We Earn $200,000 and Can’t Save. Help!

Money Audit We Earn $200,000 and Can’t Save. Help!

Mia, 35 and her husband Luke, 36, earn a combined $200,000 per year. But after paying their mortgage and rental property loan, as well as car and student loans, child care, and other living expenses, the Los Angeles couple has a difficult time socking away money in savings.

They do have about $10,000 in a rainy day account, which could cover their expenses for about one month. But adding to the account has been proving difficult.

Luke feels confident that if they ever run into a serious financial bind, they could always take advantage of their low-interest home equity line of credit. But Mia isn’t comfortable with that route. She’d prefer to have more cash on hand.

A bit more background on the couple and where they stand financially:

Luke recently transitioned to a new job as a government attorney, which he loves, but it also meant taking a 50% pay cut. That’s impacted their ability to spend and save as comfortably in recent months. It was an unexpected opportunity for which the couple wasn’t financially prepared.

Mia and Luke would like an objective look at their finances to discover ways to reduce spending, increase saving and possibly find new revenue streams. “I’d love to figure out a side-hustle, so that I can eventually leave my job and spend more time with the kiddos,” says Mia, who works in marketing. Other goals including affording a new car in a couple of years and remodeling their primary residence.

Here’s a closer look at their finances:

Income:

  • Combined salaries: $200,000 per year
  • Net rental income: $6,000 per year

Debt:

  • Car and student loan debt. $13,000 combined at 2%
  • Mortgage at primary residence $845,000 at 3.625%
  • Mortgage at rental property $537,000 at 3.5%
  • HELOC on primary residence: $200,000 (have not used any of this credit)

Retirement:

  • Mia: contributes about $1,000 total each month, including a company match
  • Luke: contributes about $1,000 total each month, including a company match

Emergency Savings: $10,000

College Savings: The couple has 529 college savings funds for both of their children. They allocate their cash back rewards from credit cards towards these accounts. Currently they have about $10,000 saved for their 4-year old and $5,000 saved for their 1-year old child.

Top Monthly Spending Categories:

  • Primary residence mortgage: $4,000
  • Primary residence property tax: $1,100
  • Childcare: $1,900 (daycare for both children, 3 days per week. Grandmother watches other 2 days per week)
  • Food (Groceries/Eating Out): $800
  • Car and student loan payments: $450

From my point of view, I think the biggest hole in Mia and Luke’s finances is their rainy day savings bucket. Relying on a HELOC to cover an unexpected cost is not really an ideal plan. In theory, the money can be used to cover expenses and the interest rate would probably be far lower than the rate on a credit card. But in reality, tapping a HELOC means falling further into debt. They do have $10,000 saved, which is good. But it’s not great.

If not for an emergency, the savings can allow them to achieve other goals. The couple mentioned wanting to buy a car in a couple years. This will probably require a down payment. Having cash can also assist with renovating their home.

Here are my top three recommendations:

Transfer Rental Income Towards Savings

Their previous residence is now a rental property. It nets them about $500 per month. The couple is using this money to pad their living expenses. Can they, instead, move this into their savings account for the next few years? The way I see it, they should have a proper six month cushion in savings to tide them over in an emergency and/or if they need money to address their goals. This rental income isn’t going to get them to this 6-month reserve too quickly, but it’s a start.

Carve Out Another $500 for Savings

While I don’t have a detailed breakdown of all of the family’s monthly expenses, I can bet that they can pare their expenses to save an additional $300 to $500. A few dinners out, some unplanned purchases at the grocery store (because you took the kids) and a couple monthly subscription plans can easily add up to $500 in one month. Whenever I want to save more, I schedule money to transfer out of my checking and into savings at the top of the month. I do this automatically and only spend whatever money I have left. I’d suggest doing this for the first month and seeing how it feels. Do you really notice the money is gone? If yes, revisit some of your recurring costs and decide on trade-offs. If Luke’s salary has decreased by 50% then the couple needs to make some modifications to their spending. The math, otherwise, won’t add up.

Can Mia Adjust Her Work Structure?

Mia is interested in a side hustle, too, to bring in extra income (which I highly recommend). Sites like tutor.com, care.com, taskrabbit.com and others can help you find quick work within her preferred time frame. In the meantime, can she and her husband find ways to adjust their work hours or commute, which saves gas, time and money?

Mia’s commute to work is one hour each way. That’s ten hours per week stuck in a car. And my guess is that while Mia’s driving, she’s paying for daycare, for at least some of those hours. Could she work from home one or two days per week to reduce her time in traffic, as well as her child care costs?

Bottom line: When Luke’s income dropped by 50%, the couple didn’t adjust spending. It may help to take pen to paper and imagine they were building their budget for the first time. Take all of their expenses off the table and rebuild the budget and lifestyle to better align with their adjusted income. Start with the absolute needs first: housing, insurance, food. And really scrutinize all other expenditures. Unless it’s an absolute need that they can easily afford it, consider shutting it off until they’ve reached a 6-month savings pad.

Comments (19) Leave your comment

  1. So my husband is a government lawyer as well, with the EPA, loves his job as well. This may seem counter- intuitive, but since you mention wanting to spend more time the kids, I would highly recommend, like I did as an Architect, quitting the job and homeschooling instead. It eliminates so many expenses ( best neighborhood for schools or private school, childcare, work wardrobe, commuting expenses, etc.) There is enough flexibility in it to allow you to work part-time from home as well, and us the most rewarding choice you could ever make.

  2. Are you serious with this? They can’t save? For what? They already have 2 (2!!!) houses, contribute to a 401k, contribute to their children’s 529s.

    1. I totally agree! They are doing amazingly well. Instead of just saying to cut an already slim discretionary spending, why don’t you suggest how they might save on their big expenses which are non-discretionary? That’s where an expert can help.

    2. That’s what I’m saying. Unfortunately I’m not this fortunate in life. My husband and I have $150,000+ in school loans, plus a lot of credit card debt, a mortgage and a car payment. And an income of about $75,000 yearly. But we do what we can. If only I had the problems this couple does life would be easier. Just accept what you have and be happy ☺️ and budget a little in there too.

    3. Why is everyone on this article focused on savings? These people are $1.4 million in debt!! Building up their savings is the least of their worries right now. They need to sell their rental home ($6k per year is not going to take care of over a million dollar problem and after considering repairs and maintenance costs, I doubt they’re actually netting $6k per year on that). Stop trying to keep up with the Joneses, get 6 jobs and read Dave Ramsey’s “Total Money Makeover”.

    4. I know, right?
      They make well above median income and have assets most of us only wish for.

      Soon the kids can be in public school, saving on child care costs.

      Maybe dad can adjust his schedule to work from home one day a week himself.

  3. Their rental property, with a mortgage of 537k, is only making them $500 a month? That seems low. My rental property, also in LA (a downtown condo), valued at 535k, earns $2400 rent a month (net $900) and that was discounted with a long term tenant. Imo they should swap out their rental for another with higher ROI.

  4. How about unloading the second home (which looks as if it is costing ~$2900 a month in interest)? That way they will be able to pay down more of their “primary” home, save, and have some wiggle room for looking for sidehustles.

    1. Their second home is paying its own interest and mortgage, based on it making a net $6k a year for it. Removing it loses then that $6k.

      Seems LA is the biggest issue, as it has such a high cost of living (although that property tax is unreally low).

      1. The second home is only helping their situation; with that much I’ll agree. $1100/mo for property tax, is not all that low. In HI, I only paid $1700/yr for my $550K home.

        It looks like they got $15,000 back in credit card rewards in about four years. These people clearly spend way too much money. I’m not sure why the credit card debt isn’t mentioned.

        If they can tap into the HELOC worth $200,000, that means they have at least that much money in equity in their primary residence. The smart play would be to find new childcare, which doesn’t charge such ridiculous fees, and take the HELOC to buy another rental property for an additional stream of income. They could also, if willing, downsize into a much less expensive residence. If they did sell, they would lose the HELOC option, and would most likely pay a huge chunk in realtor/closing costs. Interest rates have gone up quite a bit too. I wouldn’t suggest selling, unless the property’s value has had a substantial increase.

        1. You wrote:
          “It looks like they got $15,000 back in credit card rewards in about four years. These people clearly spend way too much money. I’m not sure why the credit card debt isn’t mentioned.”

          Just because they get cash back rewards from credit cards doesn’t mean that they have credit card DEBT. If they are paying the balance(s) in full every month, then they are paying no interest and a cash back card can actually save them 2%-5% of the amount they are spending.

          However, since an assumption that they are getting 2%-5% cash back suggests that they are spending $75,000 to $187,500 annually via credit cards, it does seem like personal and discretionary spending is likely part of the challenge.

  5. Sell both homes, move to the southeast where the property taxes are much lower and the housing is more affordable. Buy a $100,000 house in all cash. Probably would have enough left over to fully fund those college funds.

  6. 1. Sell primary and rental homes.
    2. 1031 exchange equity into out of California single family home rental properties that are professionally managed for a net cash flow of around $300/month after expenses.
    3. Rent to Value ratios are low in Los Angeles, so you can rent a very nice house in a good school district. Let your real property investments be in places that make better cash flow sense.
    4. Don’t eat out.
    5. Go on an all cash budget
    6 Pay off your auto and student loans (and don’t buy a new car)
    7 Explore your side hustle ideas for additional cash flow.
    8 Invest in spending time with your family and friends

  7. I don’t understand why the childcare costs are described as belonging to Mia alone. This is a two career married couple with common children. Why are the child care costs described as “hers” and attributed as a cost to her salary. Don’t they belong to both of them? The reality is that if a woman pulls back from the workforce, she affects her lifetime earning capacity to the detriment of the family lifetime savings. Daycare costs are a short-term element in a family lifecycle and should be deducted from both the father and mother’s salaries not just from the mother’s salary. There is an embedded gender bias in the entire analysis.

  8. Well my fiancé and I made 215k in 2018. I was able to invest and or save 55,000 of that. The key for us was selling our expensive house, cutting down to one car payment, extreme couponing and using rewards cards for everything. We have 7,000 in our 18 month olds 529 and over 300k in investments. It’s all maximizing every dollar and being disciplined. 1.3 million in mortgages would make me throw up daily. Come on people

  9. There has been a lot made out of the statement that the rental property is contributing $500 per month to net income, which suggests that it should stay. I would still investigate what it could be sold for. If there is sufficient equity in the property, it could sell for enough that the equity pay off debt and/or pay down the big mortgage, and that mortgage could potentially be refinanced to a more manageable payment. (Or, without refinancing, the equity could be set aside for a rainy day.)

    Alternately, depending on where the houses are, sell the big house and move back into the first house. Or sell BOTH and move into something that they can actually afford. They likely qualified for the big house when he was making the much higher salary. The big house and the smaller salary appear to be incompatible.

  10. I don like this statement his is not a good example of the top 65% of american income living in America more like 30,000 and 20,00 & which is a total of 50,000 total gross
    do the calculation with this amount

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