Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
We live in a high cost city (Chicago).
I am 34 my husband is 36.
We found a house in a good public zone that would allw us to have an au pair, which would save us In child costs and fit well for our family.
Our HHI is $285k excluding bonuses. The house is $865k.
We would put 20% down. After the down payment we would have $135k in taxable accounts, $300k in iras /401ks, and $55k in cash. No other debt except for $40k in student loans.
We can afford the monthly paments while maxing out both of our 401ks, but would not be able to save much more on top of that (though we would save any bonuses in taxable accounts). This will change in 5 years when child are costs abate.
Alternatives are buy a smaller place in the city with no au pair option. This would cost $650k to $750k. Or Move to the burbs which would make my commute long, and we really don't want to do.
So many people here have built wealth by living way below their means. This purchase is somewhat scary as it is a huge mortgage. But, we are young, I believe our incomes will only go up, and we love the house. plus, I am sick of making decisions from a place of fear.
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If you really like the home and can afford it and it has other benefits (au pair apt), I'd go for it.
A place to live that reduces commuting and stress is really important. Because it sounds like you understand the importance of saving and investing, you'll find ways to put away money when and as you can; do it now even if it's just a small 401k contribution. Of course you should have an emergency fund and a PLAN.
My two cents.
"What does not destroy me, makes me stronger." Nietzsche
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Do you have any alternatives to daily commuting? If telecommuting is available for even 2 or 3 days a week, the burbs might be more practical.
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High housing costs are a fact of life in many areas. If the house and location are choices you'll be happy with for 20+ years and you can still max out 401Ks (and IRAs) I think you are fine although you will also have college savings. I would not trade the shorter commute (for decades) for a lower cost per square foot house in the suburbs. Time is valuable, and there are definite lifestyle benefits to close-in residential neighborhoods like Oak Park.
Other considerations are your future incomes. Will you both continue to work? Do either of you have high potential for future raises? Finally, how much money will you need to put into the house? 50+ year old houses always need something repaired/replaced, and often there is a desire to upgrade/modernize.
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Looking over from the Hoosier state, I cringe every time I see the property tax rates you guys are paying.
5 years from now your child care costs may go away, but that also means you'll also be 5 years closer to college costs. You didn't list any 529 money in your portfolio. You can certainly afford the house, but it may leave you a bit house poor for a while. If you believe the quality of life improvements of getting that house are worth cutting back a bit in other areas (delaying retirement, less expensive vacations, etc.) then you should buy the house.
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Do you anticipate needing the space the au pair will occupy once your kid is in school? Or is it just going to be extra space that you are paying for and don't really need? You will be paying for that space for as long as you live in the house (property taxes when the mortgage is gone). You also haven't stated how much you will save in child care and whether this house would allow you to send your kid to public school instead of private school.
I would lean towards the 650-750k house; maxing 2 401ks at your income level is not enough savings even if you both get good matches. And you will be in big trouble if either of you needs/has to take some time off work voluntarily or involuntarily.
"Index funds have a place in your portfolio, but you'll never beat the index with them." - Words of wisdom from a Fidelity rep
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Last edited by Sam I Am
on Sun Oct 06, 2013 10:59 am, edited 1 time in total.
Sam I Am
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Other factors are the age of your kids, whether you plan to have more kids, and your and your husband's respective job security (or ability to get other jobs in Chicago if you lose your current job).
But making some assumptions on those factors based on your post (e.g., child care costs abating in 5 years), it seems like the $865k house is better than the alternatives you suggested. Yes, money will be a little tighter than you are used to for a few years, but it's worth it if the house is sufficient for your needs, and there is nothing less pleasant than facing a long commute for the next 20 years. Post-au pair, you can decide between renting the space or using it as a guest suite.
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Thank you for the thoughtful responses everyone. We have two children and have been / will be putting in $10k per year for each (grandparent gift). This is obviously not a guaranteed thing, but there is already a sizable chunk in each.
The au pair would save us about $700 per month but more importantly offer us flexibility. Being in a good public zone saves a LOT in tuition, tho to be fair we could achieve this with a smaller place. In about 5 years we will have an additional $2800 month to play with when we don't have to pay for the au pair and pre school.
Once the au pair is gone, we will use the guest suite for family. We are close with both our families and hope they will come often.
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I'd move an hour's drive away for peace of mind. Even with 20% down, a mortgage that size is scary. And cities are not ideal places to raise kids. My parents and I grew up in cities. We couldn't wait to get out.
I'd buy a less expensive house in the suburbs and take the kids to Europe every two years.
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Your question seems to boil down to whether maxing out 2 401ks is enough. I think it might be.
-You've already got a good chunk of money saved for retirement.
-At some point, you will again be able to save more
-The bonuses can go into Roth IRA via the back door (if you don't have other traditional SEP or SIMPLE IRAs "in the way").
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Go for it. Most major cities are high cost of living. You have plenty of income to support that mortgage.
Just don't get into the trap of keeping up with the Jones's on vacations, dining out, entertainment, cars, etc., etc.
Trident D-5 SLBM- "When you care enough to send the very best."
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Given your high salaries I would question whether just saving the max in 401ks and IRAs is enough for retirement. It all depends on what you expect to be doing when the time comes.
Have a look at the chart in this post
to get a better idea of how much you need to be saving for retirement.
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OP, I do not know what you mean by being in a good public zone. If you mean good public schools, as an outsider who just reads the newspapers, including the Chicago Tribune, I know there are a lot of switcheroos that are happening and will be happening in Chicago. I wouldn't be confident in a specific public school. Although a city like NYC is even higher cost than Chicago, it seems to be "must have" for foreigners and the ultra wealthy. In Chicago I see a city that is in seirous financial trouble with major unfunded liabilities, a very poor public school system and labor difficulties that appear quite serious. The new mayor is having a rough time. I do not know if Chicago "holds" or goes the way of Detroit. Chicago is further hampered by being part of the Illinois underfunded system problem. I would be very reluctant to buy in Chicago at any price as there could be massive or complete losses down the road. Only time would tell. Better to rent or get out of there entirely in my opinion. Good luck.
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Yeah. The closing of public schools and the gun problem.
Even if you decide to send your kids to a private school, you can't always get away from it. I went to a prestigious private school near NYC and couldn't get away from it. The kids brought the ghetto into the suburbs. It was bad.
I wouldn't live in Chicago.
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Another issue to consider is the condition of the house. The inspectors realtors refer you to can give overly optimistic assessments of what repairs or structural issues come with the house. You need to be very careful here as repairs can make your home much more expensive. Price any needed work with independent contractors.
We passed on one home we loved when the builder we brought in to inspect explained that the day we pulled a permit for anything we would have to rewire the whole house as it was way under code. The kitchen layout was a bit odd because the plumbing had been done by an amateur. There was also asbestos, and the garage roof required new shingles. The "small changes" the realtor had said would be easy would have cost half again what the house cost.
The first house we bought was inspected by a guy who found nothing. We ended up forced to buy a roof, a new dishwasher, disposal, and water heater, and had to paint suddenly peeling trim. The deck had to be rebuilt when the central support heaved up. All within 2 years--when we were financially stretched from buying it. So be very careful. First time buyers can be sold homes experienced home owners would avoid. This is true in any price range.
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Scooter57 wrote:The inspectors realtors refer you to can give overly optimistic assessments of what repairs or structural issues come with the house.
Not only do you need to be careful, you should never use an inspector suggested by the real estate agent (even your agent) or by the seller. You need an inspector who has absolutely no interest in anyone but you.
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Thirty or forty years ago, a guideline was "buy a house which costs less than three times your annual income." By modern standards, that's almost impossible to do in major urban areas, so what the OP is spending, roughly 4 times isn't bad.
The original post made no mention of an emergency fund and that worries me. I presume that at that income level both members of the couple are professionals. What if one of you is unemployed for "only" six months? What if one of you receives a promotion in another city? In the flush old days, the company would often arrange to buy the house when some one was transferred, but now they may just cover sales expenses and you could be forced to sell in a down market. There's also the issue of the other one of you having to find a job in the new city and that might not happen fast.
A more substantial than usual emergency fund might be a really good idea.
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I live in the city of Chicago and observe that while some upper middle class white people are willing to send their children to a select few of the primary schools, none of the neighborhood public high schools are deemed to be acceptable, so you will likely have to pay for private school if your kids can't get into one of the magnet schools or move to the suburbs.
Having said that, I would buy the house. Unlike some of the other posters, I think Chicago is doing quite well. Many areas have become gentrified and others continue to do so. People flood into Chicago after graduating from Big 10 colleges and a lot of them stick around. There is high demand for real estate and rentals due to the desire for an urban walkable lifestyle and I see that continuing. The crime is an issue but it really is restricted to certain neighborhoods and doesn't spill out to the middle class areas.
Last edited by chicagobear
on Sat Jun 29, 2013 7:39 pm, edited 1 time in total.
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A big question is how will the area be when the kids are older and they old enough to go out on their own.
Is there any chance you could find jobs in a less expensive and better family area? The numbers might work out better even if you made less or lived on one income until the kids are in school. Having a high income does not mean a lot if it all goes to pay for an expensive house.
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I can totally understand not wanting to commute. Robs you time you will never get back, causes higher stress, bad for the environment, drives up transportation/vehicle/gas/maintenance costs, etc. So let's assume the choice is a small house or the big house.
$650k-750k is the other option. Let's call it $700k.
House you like is $865k.
+ Added cost is $165k
Can't tell if the nanny space has a direct cost benefit - seems like the cost of a nanny would be fairly close to the cost of daycare for two, but as you said offers more flexibility. This flexibility will probably help your careers, which translates to higher compensation or at least keeping the compensation you have.
+ Impact of 865k house on childcare is towards the positive economically. Is it $32k/year ($165k premium of big house/5 years of childcare)?
What is the added property tax of the larger house? I'm going to guess at least $1.5 to $2k year.
- Estimate $40k in todays dollars assuming you stay in the big house 20 years
On a yearly basis, it seems like your mortgage payments will be about $50k/year on the $865k house, and $38k on a $700k house.
- Estimate $12k year more until you pay down to the amount similar to the $700k house. Maybe you can throw the $2800 month towards the big mortgage in 5 years.
Your emergency fund is about a years worth of mortgage payments, so that is good, but based on what you wrote, it does not sound like it will be increasing much if you by the big house. You could tap your taxable accounts if needed.
I'd go for it but try to cut back on other expenses to find at least another $20k in the budget annually for the next five years to put towards the emergency fund/Roths, etc.
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I'm a fan of short commutes and living in cities, so I agree with your desire to choose this neighborhood over an outer suburb. Paying more for proximity and walkability is in some ways a consumption choice since you can save money by living in the suburbs. But you're getting more time to spend at home.
As for buying a house for an au pair, I hesitate a little bit if you only need the au pair services for a few years. But I don't know a better option other than renting a bigger place until the au pair is no longer necessary, and that would depend on rental rates in your area.
For home value, I think you're better off buying a home in an older, well-established upper-middle-class neighborhood than buying in a newer suburb an hour from downtown. Where I live, some middle- and upper-middle-class suburbs have gone downhill after a generation or two because the suburbs became dated and young families instead prefer to buy a new home in a trendy new suburb. It's not always the case, but in my view you're taking a bigger long-term risk buying in a new development than in a neighborhood that has been established for 50+ years and attracts affluent families.
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I think you are cutting things a bit tight. Home ownership means higher expenses with maintenance, etc. I have lived in the Chicago area for over 20 years. You would be much better off buying in the suburbs. You can get a larger home for much less money than you have quoted and will have much better options for schools. You can buy something near a Metra line and have easy access to the city.
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Having mortgage that is two and a half times your income will likely be tight if you want to ccontinue to save outside of the 401k. It will really depend on what the rest of your expenses. They will go up with the house.
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I'd go for it. This is really not a stretch on your incomes. I live in a high cost city as well, and having a house that is close in, with good schools, and other neighborhood resources is well worth it to me in quality of life. As others have suggested, just don't get carried away on other expenses and luxuries. I'd make every effort to save whatever bonuses might come your way, but you are on solid footing with salaried income.
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I can't really say too much on the house because more goes into the decision that what has been presented like potential resale value if life changes on you, etc..
But here is what I can say from experience;
Don't plan on child costs going down when you no longer have childcare expenses because what happens is....your child ends up in a lot more activities that cost a lot of money. There is also the summer; where you want them to go to various academic and athletic summer camps that cost upwards of $300 per week. In the end, their activities plus summer camps end up costing as much as preschool/childcare did. Clothes cost more, shoes cost more, they have hobbies. So if you are depending on that cost going down...don't.
Don't underestimate the value of having a short commute. Being close to your kid's school during the day will be awesome. If they have trouble, you are right up the street. You have more flexibility with a short commute; which can actually help you in your career. I've done both and I wouldn't go back to a long commute to live in a mansion.
If something happens, you could always reduce your 401k contribution, but I really think you guys are already behind in your retirement savings. But only you know that based on when you plan to retire and how much you will need in retirement. We are the same age as you and we have estimated that we will need 6 million. Chicago has a much higher cost of living, so I would imagine that you'd need more. With that said, I think your maxing out your 401k and IRAs is not going to be enough.
To be honest, you wouldn't be here asking if you were totally comfortable making that purchase. For that reason alone, you should probably pass and look for a great house about 100k less.
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I would like to see a number > 3.5% (since 1990) http://www.neighborhoodscout.com/il/chicago/rates/
If below 3.5% I would probably pick the $650k option if I could ensure that I had the correct school district, bedroom and bathroom for au pair, let kids share? and lot size to expand from your "Alternative to buy a smaller place in the city with no au pair option. This would cost $650k to $750k."
I completely understand paying for big mortgages, small commutes and paying an extra $100k+ for the right school district. However, if it is borrowed money, I would tend to not try to get everything at once... just focus on the things that can't be easily deferred (school district) but edge into the ideal and then allocate bonus etc to extensions or improvements.
Sounds like you have no issues affording the $850k if that is what you want... but I would get more value from the other $200k from e.g. another rental property that I would expect to appreciate at > 3.5%, cost me zero cashflow and 100% ownership in 15 years. However, I also enjoy my 15 year old car - so I think your question is more about how you find value
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