I don’t think that’s even remotely the case for the vast majority of the workforce. It takes an incredible position of privelege to think otherwise.
For the average US citizen, they have a spare ~$200/month (see my comment history for context) the median US home price is $420,385 according to redfin. That means your closing costs (4%) + minimum down payment (3.5%) for an FHA loan would be (.075 * 420385) $31,528 which would take 157 months assuming you had no emergencies or extra expenses at all. Leaving you destitute to pay your mortgage on a home which will have inevitably increased in price since you started saving.
It’s a pipe dream for most US citizens, everyone has surprise expenses. People lose jobs, people buy things for leisure (what’s the point of living if you don’t?) Once they spend their 13 years of perfectly saved money to buy the average house, how do they afford the inevitable expenses? Save another 13 years to pay for another roof? Unfortunately now they have a mortgage which will be more expensive than their rent.
I assume the context you’re talking about is this article:
U.S. households’ average monthly expenses total $6,081
And then you estimate the income as being ~$6275 or so, hence your $200 extra number.
That figure seems to come from this study by BLS. Instead of taking that number at face value, let’s take a look and see where people are spending their money. The following is for a 4-person family unit, because that’s the default for the USDA food plans (dollar figures assume $6083 per month to expenses):
- Housing - 31.6% - $1922
- Transportation - 18.4% - $1119
- Food - 12.9% - $785
- Personal insurance and pensions - 14.1% - $858
- Healthcare - 7.2% - $438
- Entertainment - 4.7% - $286
- Other - 11.2% - $681
What stands out to me is the insane amount of spending for transportation. Here’s what I estimate, assuming two cars and excluding acquisition costs:
- insurance - I pay about $50-75/month for our older two cars with liability only insurance (YMMV by area and police record)
- gas - @30mpg, 20k miles/year, and $4/gallon (national average is <$4) - $222
So let’s assume $300/month for both, that means people are spending ~$800/month on acquisition and maintenance. That’s nuts! Over 10 years, that’s ~$96k! You can buy a new car for $25-30k with a 10 year warranty, so something doesn’t add up. If you finance new cars, you’re usually forced to get comprehensive insurance, so not only are you paying a high finance charge (including interest), you’re also forced into a higher insurance payment.
My strategy is to buy quality older cars and keep them for 10 years or so. For example, I bought one car ~9 years ago for $10.5k w/ ~60k miles, and I’ve spend <$5k total (probably $2-3k, I DIY pretty much everything) on repairs and maintenance. But let’s say I actually spent $5k, that means my average monthly expense is ~$140 for acquisition and maintenance. Double that and I’m under the average expenses in a car by almost half ($300/month for insurance+gas and $300/month for acquisition and maintenance, so $600 vs ~$1100).
So just with that, we can increase the savings per month by $500, meaning $700/month saved. To get that $30k down payment would take ~4 years. That’s totally reasonable.
I think people on average just don’t know how to follow a budget, save money, etc. I really don’t think we have an income problem in the US (at least for the median household), we have an education and priorities problem.
If you have actual numbers for a household, I’d love to go through it because I’ve made a ton of assumptions here.
I think people on average just don’t know how to follow a budget, save money, etc. I really don’t think we have an income problem in the US (at least for the median household), we have an education and priorities problem.
Bingo. But people don’t want to hear that the problem is themselves, it’s far easier to complain about and blame other people.
Exactly.
I can point to plenty of extreme examples of rich people losing everything because of poor financial planning, such as lottery winners, sports stars, and trust fund kids. You can’t outearn a spending problem, and you can often outsave an income problem. Most millionaires are also frugal, and that is extremely interesting to me.
For example, my brother retired super early because he was extremely frugal, and now he lives on a pretty typical average income in terms of regular spending (though his house certainly isn’t typical). He’s a millionaire, but he lives on someone like $60k/year. Why? He doesn’t see value in spending more money, so he stopped working as soon as his savings growth outpaced his spending needs. He had a great job (actuary, eventually became VP), and he decided to retire at 40 after living in $50-60k/year or so and earning more than double that.
On the flip side, my cousin lives in a higher cost area than me and they’re in a single income household making a mediocre salary (social worker, so something like $70k in a higher cost area). They own a house and are on their way with retirement savings, and they do this while having four kids. Part of their plan is to live near family so they have free baby sitters, inexpensive vacation options, and someone to help with household projects. I’m guessing they spend about $50-60k/year just like my brother. They’ll probably work until normal retirement age and have a healthy retirement.
So I look at these examples and can’t help but think that money problems are often symptom of poor financial education or mismatched priorities, or both. Occasionally there’s a legitimate income problem, but if you’re making around an average income, it’s usually a budgeting problem.
I don’t disagree that spending less on transportation helps to save for a down payment. Finding inexpensive and reliable cars is not an easy task, but for people who were lucky, like myself, to find one it makes one chunk of the budget easier to stomach.
I own a home, so I’m not speaking from a place of woe is me, but from a position of empathy.
Don’t forget you have to qualify for your mortgage, even if you have a downpayment. Lenders will let you spend up to a max of 43% (and most far less than that) of your pretax income on your mortgage payment. If you’re the average household, 6275 * .43= $2698.25 monthly maximum payment. The average home price is $420,385 as we established earlier. Minus our down payment you could almost (but not quite) afford the loan with a PITI of 43%, the new payment would be around $2700/month with interest rates as they are today around 7.5%. But let’s say you are above average income wise for the sake of the narrative.
Oh shoot, $2700/month? That changes our household budget, now you’re spending at least an extra $800/month not including maintenance, utilities, and the many other expenses that come with home ownership. If you take that money out of your transportation budget you’re left with $300/month, hope you don’t have any surprise expenses! If your property taxes go up you have to give up something to afford it. Lose your job, lose your house. Paycheck to paycheck for the next 30 years, sounds like a nightmare to me.
On top of that affordability is getting worse, living expenses are rising, wages aren’t rising as quickly, the average person who didn’t luck into a home already will be less and less likely to afford one.
In my area, the average is right around $450k, so I think we’re pretty representative of the rest of the US. I did a quick search, and I saw a dozen or so listings for townhouse around $300-350k. If we look at the top end, with a 20% down payment ($70k), the mortgage+HOA is ~$2500/month. If we look at the bottom end, it’s ~$2300. I even see one as low as $2k/month. Note, this doesn’t include utilities or maintenance. So for an average household income of $6275, we’re looking at 30-37% of your income for the mortgage + HOA.
Rent for a similar place (2-3 bed, 2 bath) is $1500-2000. So it is currently cheaper to rent in terms of cash flow, but buying keeps your payment constant (inflation will be on your side) and builds equity, so longer term it should still be cheaper to own vs rent.
left with $300/month
Are you assuming a massive $800/month transportation budget or something?
Let’s assume $6275/month income, here’s a budget that I think makes sense:
- mortgage + HOA - $2500/month (could save $200 or more buying a cheaper place)
- food - assuming 4 person household with young kids (two under 5, which should be the target for these houses) - ~$900 (if you don’t have kids, it’s ~$550); this is the low cost food plan, not the “thrifty” food plan
- transportation - ~$700/month; insurance ($50-100 in my area for two cars), gas ($100-150), maintenance/repairs (~$50/month), yearly registration ($100-150 in my area, so <$15/month); purchase price (assuming buying used and keeping for 10 years, a 2017 Corolla is ~$17k and a 2007 is ~$5k, so $1.2k/year or $100/month; add taxes and fees and assume ~$150/month on the high side)
- utilities - ~$300/month; we spend a little more, but our house is larger than the ones i referenced (2400sq ft)
- taxes without any retirement savings - ~$8000/year, or ~$670/month (my state is ~5%, federal is ~11% at this income, so 16% of $75k)
So, the major expenses come out to ~$5100/month. Add in another $500 or so for other stuff, and $5600 is a decent spending estimate. That leaves $600-700/month for savings, or 10-11%. Typical retirement savings goal is 10-15%, and that could be met by trimming some of these expenses by $200-250/monthn (a lot of that is taxes if going for pretax investments).
So yes, mortgage rates and property values certainly make things difficult, but I hope I’ve showed that it’s not as hopeless and many people assume. I think the average household could own a house and still save 10-15% of their pretax income. They’d need to drive older cars, but nothing unreasonable (5-15 years old; both of my cars are 15+ years old and have minimal maintenance costs).
Unfortunately, the average person seems to suck at budgeting, which is why I say it’s more often a budgeting problem instead of an income problem. The important thing is to establish good budgeting habits early, and then the focus should be on increasing income. Ideally, as your income rises, your spending doesn’t rise as quickly, so you end up with more cash flow as you get to the point where you want to invest in a house.
