Clements: Your "Number One Number"

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iceport
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Clements: Your "Number One Number"

Post by iceport » Sat Nov 11, 2017 1:52 pm

IF THERE’S ONE NUMBER that drives our financial lives, it’s our fixed living costs. We’re talking here about regularly recurring expenses that are pretty much unavoidable, such as mortgage or rent, car payments, property taxes, utilities, insurance premiums and groceries.

Why are fixed living costs so important? There are five reasons.

Number One Number

This statistic was rather shocking:
I advise keeping total fixed living costs to 50% or less of pretax income—and yet the typical American family spends that much just on their home and car.
:shock:
"Discipline matters more than allocation.” ─William Bernstein

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Mel Lindauer
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Re: Clements: Your "Number One Number"

Post by Mel Lindauer » Sat Nov 11, 2017 5:01 pm

We were fortunate to have Jonathan Clements join us at our 2017 Bogleheads Conference. He sat on the Q&A with the Experts Panel and signed books and chatted with folks during the book signing session.

Jonathan's planning to attend next year's Bogleheads Conference.
Best Regards - Mel | | Semper Fi

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TD2626
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Re: Clements: Your "Number One Number"

Post by TD2626 » Mon Nov 13, 2017 8:53 am

Interesting article. I agree that recurring expenses are something that aren't considered enough. They happen again and again, so they are very important.

Reducing recurring expenses that eat away at the budget week after week is an important thing to do to enable living below ones means. Living below one's means is essential to enable the savings flow to investments that can produce long run high returns.

Of course, clamping down on large one-time expenditures is also important - not spending to excess on cars, houses, tuition, etc.

If one reduces the cable package to save $50 a month, that saves $50*12*10=$6000 over a 10 year period.
If one buys a used car instead of a new car, one could save more than that in one fell swoop. However, the opportunities to make little cutbacks here and there are far more numerous than the opportunities to make cutbacks on big expenses, so budgeting in both areas is important.

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Re: Clements: Your "Number One Number"

Post by yukonjack » Mon Nov 13, 2017 9:10 am

IMHO the key to it all is eliminating a mortgage. Paying cash for autos is icing on the cake. I realize that this concept doesn’t apply to the vast majority of people but once the mortgage is paid off hitting the 50% is quite doable. It also gives you more flexibility with retirement spending. I figure if I’m living on less than 50% of current pretax income I don’t have to fret so much about having enough to spend in retirement.

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Re: Clements: Your "Number One Number"

Post by jhfenton » Mon Nov 13, 2017 9:25 am

iceport wrote:
Sat Nov 11, 2017 1:52 pm
This statistic was rather shocking:
I advise keeping total fixed living costs to 50% or less of pretax income—and yet the typical American family spends that much just on their home and car.
:shock:
That is hard to imagine. Our mortgage (principal, interest, property taxes, insurance) is about 9% of gross income, and that's not counting the third floor apartment. If we net out the rent on that, net housing cost is less than 6%. Our two cars (2008 Ford Fusion, 2012 Honda Odyssey) are paid off. Even counting home and car maintenance, utilities (high in our large, century-old house), car insurance, and gas, we're still not far above 10% of gross income for housing and transportation.

It's no wonder folks can't save for retirement when they're spending so much on basic living expenses. (And we don't even have cable, though we do have gigabit internet. :beer )

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Re: Clements: Your "Number One Number"

Post by Steve723 » Mon Nov 13, 2017 9:51 am

jhfenton wrote:
Mon Nov 13, 2017 9:25 am
iceport wrote:
Sat Nov 11, 2017 1:52 pm
This statistic was rather shocking:
I advise keeping total fixed living costs to 50% or less of pretax income—and yet the typical American family spends that much just on their home and car.
:shock:
That is hard to imagine. Our mortgage (principal, interest, property taxes, insurance) is about 9% of gross income, and that's not counting the third floor apartment. If we net out the rent on that, net housing cost is less than 6%. Our two cars (2008 Ford Fusion, 2012 Honda Odyssey) are paid off. Even counting home and car maintenance, utilities (high in our large, century-old house), car insurance, and gas, we're still not far above 10% of gross income for housing and transportation.

It's no wonder folks can't save for retirement when they're spending so much on basic living expenses. (And we don't even have cable, though we do have gigabit internet. :beer )
I'd be a little careful. There is the numerator and the denominator. Perhaps your denominator is a lot larger than the average household. And if you are in a blue collar/skilled trades profession in NYC, San Fran, etc. I can easily see why this figure gets close to 50%.

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Re: Clements: Your "Number One Number"

Post by jhfenton » Mon Nov 13, 2017 10:21 am

Steve723 wrote:
Mon Nov 13, 2017 9:51 am
I'd be a little careful. There is the numerator and the denominator. Perhaps your denominator is a lot larger than the average household. And if you are in a blue collar/skilled trades profession in NYC, San Fran, etc. I can easily see why this figure gets close to 50%.
I understand our denominator is a bit higher. But if we had the median household income instead of nearly 3x, we'd still be way under 50%.

I just don't understand HCOL areas in general. Prices for housing are incomprehensible to me.

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Re: Clements: Your "Number One Number"

Post by 1210sda » Mon Nov 13, 2017 10:23 am

Clements says to keep total fixed living costs (mtge, auto pmts, prop taxes, utilities, ins prem and groceries) to only 50% or less of pretax income.

If a typical take home pay is about 68% of gross salary, after you account for the 50%, you only have 18% left for the "fun stuff". Out of the fun stuff, you still need to take out for savings (other than retirement plan savings).

Maybe 50% is too high. (He did say "or less" didn't he)

1210

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iceport
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Re: Clements: Your "Number One Number"

Post by iceport » Mon Nov 13, 2017 2:18 pm

Mel Lindauer wrote:
Sat Nov 11, 2017 5:01 pm
We were fortunate to have Jonathan Clements join us at our 2017 Bogleheads Conference. He sat on the Q&A with the Experts Panel and signed books and chatted with folks during the book signing session.

Jonathan's planning to attend next year's Bogleheads Conference.
That's fantastic news, Mel. That adds one more attraction to the long list for attending the conference. Though we are of similar ages, I feel like I've "grown up," financially speaking, reading Jonathan Clements. His writing is deceptively concise, but it's always packed with wisdom and often with unusual perspectives, found with a careful reading. I check in on his site, HumbleDollar, at least once a week. The current blog entry format usually offers insights in smaller bites than his old WSJ columns did, but I found this one particularly good.
"Discipline matters more than allocation.” ─William Bernstein

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iceport
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Re: Clements: Your "Number One Number"

Post by iceport » Mon Nov 13, 2017 2:32 pm

Steve723 wrote:
Mon Nov 13, 2017 9:51 am
jhfenton wrote:
Mon Nov 13, 2017 9:25 am
iceport wrote:
Sat Nov 11, 2017 1:52 pm
This statistic was rather shocking:
I advise keeping total fixed living costs to 50% or less of pretax income—and yet the typical American family spends that much just on their home and car.
:shock:
That is hard to imagine. Our mortgage (principal, interest, property taxes, insurance) is about 9% of gross income, and that's not counting the third floor apartment. If we net out the rent on that, net housing cost is less than 6%. Our two cars (2008 Ford Fusion, 2012 Honda Odyssey) are paid off. Even counting home and car maintenance, utilities (high in our large, century-old house), car insurance, and gas, we're still not far above 10% of gross income for housing and transportation.

It's no wonder folks can't save for retirement when they're spending so much on basic living expenses. (And we don't even have cable, though we do have gigabit internet. :beer )
I'd be a little careful. There is the numerator and the denominator. Perhaps your denominator is a lot larger than the average household. And if you are in a blue collar/skilled trades profession in NYC, San Fran, etc. I can easily see why this figure gets close to 50%.
I guess I'd have to agree with jhfenton on this. When I applied for a mortgage 20 years ago, the absolute caps on borrowing were a PITI payment of 28% of gross income, and a total debt load of 34% (or maybe 36%) of gross income. Not only was that the mortgage industry's way of limiting mortgage risk, it was just plain good common sense for personal finances. (I purposely stayed below those caps.) I have no idea what the industry standard affordability tests are today, but we've already seen one result of the relaxed standards (in 2007/2008).
TD2626 wrote:
Mon Nov 13, 2017 8:53 am
Of course, clamping down on large one-time expenditures is also important - not spending to excess on cars, houses, tuition, etc.
This is unquestionably true, and those are the three classic big ones. I have to keep remembering that last one, as educational costs were *not* typically large expenses when I incurred them (early- to mid-1980s).
"Discipline matters more than allocation.” ─William Bernstein

LiterallyIronic
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Re: Clements: Your "Number One Number"

Post by LiterallyIronic » Mon Nov 13, 2017 2:58 pm

jhfenton wrote:
Mon Nov 13, 2017 9:25 am
iceport wrote:
Sat Nov 11, 2017 1:52 pm
This statistic was rather shocking:
I advise keeping total fixed living costs to 50% or less of pretax income—and yet the typical American family spends that much just on their home and car.
:shock:
That is hard to imagine. Our mortgage (principal, interest, property taxes, insurance) is about 9% of gross income
And you think you're anywhere near the average? I put 29% down on the cheapest house I could find in my town - $209,000. Still results in a PITI that is 16% of my gross income (20% of net). And you better believe the average person doesn't find the cheapest house possible and put 29% down.

You make three times the median income. House prices don't scale all the way - there is a lower limit. A person that makes 1/5th of your income can't buy a house that costs 1/5th the price of your house (probably).

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Re: Clements: Your "Number One Number"

Post by jhfenton » Mon Nov 13, 2017 3:06 pm

LiterallyIronic wrote:
Mon Nov 13, 2017 2:58 pm
And you think you're anywhere near the average? I put 29% down on the cheapest house I could find in my town - $209,000. Still results in a PITI that is 16% of my gross income (20% of net). And you better believe the average person doesn't find the cheapest house possible and put 29% down.

You make three times the median income. House prices don't scale all the way - there is a lower limit. A person that makes 1/5th of your income can't buy a house that costs 1/5th the price of your house (probably).
None of that changes the fact that I find it hard to understand what folks justify spending on houses. Even on this forum, I see lots of "Can I afford this house?" questions. I never respond, because my answer would almost always be no. :beer

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iceport
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Re: Clements: Your "Number One Number"

Post by iceport » Mon Nov 13, 2017 3:23 pm

jhfenton wrote:
Mon Nov 13, 2017 3:06 pm
LiterallyIronic wrote:
Mon Nov 13, 2017 2:58 pm
And you think you're anywhere near the average? I put 29% down on the cheapest house I could find in my town - $209,000. Still results in a PITI that is 16% of my gross income (20% of net). And you better believe the average person doesn't find the cheapest house possible and put 29% down.

You make three times the median income. House prices don't scale all the way - there is a lower limit. A person that makes 1/5th of your income can't buy a house that costs 1/5th the price of your house (probably).
None of that changes the fact that I find it hard to understand what folks justify spending on houses. Even on this forum, I see lots of "Can I afford this house?" questions. I never respond, because my answer would almost always be no. :beer
What are the standard mortgage affordability tests these days?

(Using the old 28% house payment/36% total debt tests, nobody would come close to spending 50% on houses & cars.)
"Discipline matters more than allocation.” ─William Bernstein

wrongfunds
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Re: Clements: Your "Number One Number"

Post by wrongfunds » Mon Nov 13, 2017 4:39 pm

Using the old 28% house payment/36% total debt tests
One would think that these ratios should remain the same regardless as they are invariant to the interest rate or the health of the stock market or the economy. The ratio already takes in to account all those factors automatically.

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Re: Clements: Your "Number One Number"

Post by Texanbybirth » Mon Nov 13, 2017 4:50 pm

We're at 26% gross, 33% take home for PITI. Based on our financial situation, that's the max I'd recommend anyone taking out. Our mortgage is literally our only debt. I can't imagine having a car loan/student loan on top of that. I know people do it, but knowing my personality I'd be even more anxious than I (naturally) already am. :beer

(We do save 15% off the top. 15% 401k + 26% mortgage + 10% tithe + 7.65% FICA + 4% eff. inc. tax + 8% prop taxes= 70.65% of my income on 6 items - wow. That was an eye-opening calculation I'd never done before.)

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Re: Clements: Your "Number One Number"

Post by david_that_guy » Mon Nov 13, 2017 5:28 pm

In my area, the median house is about $560,000. Even with 20% down, mortgage plus property taxes will be a hefty percentage for any family when the median household income in the same area is $68,000. That assumes, of course, that someone with that median income could qualify for such a mortgage. Even with ahigher income, it's tough to keep house and car payments under 50% in the Boston area.

Personally, I bought a much smaller than average house and paid off the mortgage in 20 years. Still, I couldn't save anything during the first several years. In hindsight, I probably should not have bought a house at all. Though, in fact, it worked out fine.

In short, in many areas Clement's advice (which I agree with) is not easy to follow if you want a house for your family.

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Re: Clements: Your "Number One Number"

Post by technovelist » Mon Nov 13, 2017 6:00 pm

Well, let's see.
(All percentages are of pre-tax (and post-tax :D) cash flow, which includes SS and withdrawals from savings)

1. Mortgage or rent: 0 (house paid off)
2. Car payments: 0 (3 paid-off vehicles)
3. Property taxes: 3%
4. Home insurance: 3%
5. Utilities: 10%
6. Life insurance: 7%
7. Medicare supplement and copays: 7%
8. Credit card fees: 1%
9. Groceries: 7%

Total: 38%.
In theory, theory and practice are identical. In practice, they often differ.

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Re: Clements: Your "Number One Number"

Post by wrongfunds » Mon Nov 13, 2017 8:25 pm

Credit card fees: 1%
What? You need to give up your BH credentials :shock:

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Re: Clements: Your "Number One Number"

Post by technovelist » Mon Nov 13, 2017 8:33 pm

wrongfunds wrote:
Mon Nov 13, 2017 8:25 pm
Credit card fees: 1%
What? You need to give up your BH credentials :shock:
I get thousands of dollars worth of benefits, mostly frequent-flier miles and point, from those credit cards.
Should I deduct that from the cost? :mrgreen:
In theory, theory and practice are identical. In practice, they often differ.

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Re: Clements: Your "Number One Number"

Post by Grt2bOutdoors » Mon Nov 13, 2017 9:37 pm

jhfenton wrote:
Mon Nov 13, 2017 10:21 am
Steve723 wrote:
Mon Nov 13, 2017 9:51 am
I'd be a little careful. There is the numerator and the denominator. Perhaps your denominator is a lot larger than the average household. And if you are in a blue collar/skilled trades profession in NYC, San Fran, etc. I can easily see why this figure gets close to 50%.
I understand our denominator is a bit higher. But if we had the median household income instead of nearly 3x, we'd still be way under 50%.



I just don't understand HCOL areas in general. Prices for housing are incomprehensible to me.
HCOL areas typically have high concentration of populations in a smaller than average land mass. Demand for housing is high enough to keep cost of housing higher than average.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Clements: Your "Number One Number"

Post by jhfenton » Mon Nov 13, 2017 9:53 pm

Grt2bOutdoors wrote:
Mon Nov 13, 2017 9:37 pm
HCOL areas typically have high concentration of populations in a smaller than average land mass. Demand for housing is high enough to keep cost of housing higher than average.
:D I understand economics and why HCOL areas are HCOL. :beer My personal preferences, both financial and environmental are simply such that I can't imagine choosing to live in them. When we retire, we plan to move out somewhere out west with mountains, but it will be ID, WY, MT, CO, AZ, UT, etc., but not CA. A lot of my...um...personal property...would be illegal in CA.

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Re: Clements: Your "Number One Number"

Post by Caduceus » Tue Nov 14, 2017 3:48 am

Yes, fixed costs are so important. There's this kid that I'm mentoring who's in graduate school, and it's likely I will offer him a job once he finishes school.

These are the numbers I think: He gets $33,000 in living costs from his school, and he earns $9,000 over the summer doing his own gig. He earns only $42,000. He saves an amazing $20,000 a year, maxes out his IRA, but isn't eligible for a 401k or 403b. Rent in a HCOL area is $750 that he shares with two other roommates. No TV, only Netflix. No phone plan, just Skype and a prepaid card. He eats like a prince because this snooty Ivy League school always has free food at conferences and events, etc. but otherwise eats healthily and simply. Doesn't own a car. As far as I can tell, he's going to graduate after 4.5 years of the program with more than $100,000 in savings, and that's before investment gains.

He's not the typical grad student, but he's perfectly happy.

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Re: Clements: Your "Number One Number"

Post by LiterallyIronic » Tue Nov 14, 2017 10:12 am

jhfenton wrote:
Mon Nov 13, 2017 3:06 pm
LiterallyIronic wrote:
Mon Nov 13, 2017 2:58 pm
And you think you're anywhere near the average? I put 29% down on the cheapest house I could find in my town - $209,000. Still results in a PITI that is 16% of my gross income (20% of net). And you better believe the average person doesn't find the cheapest house possible and put 29% down.

You make three times the median income. House prices don't scale all the way - there is a lower limit. A person that makes 1/5th of your income can't buy a house that costs 1/5th the price of your house (probably).
None of that changes the fact that I find it hard to understand what folks justify spending on houses.
You find it hard to understand that there are not houses cheap enough to be 9% of the average person's gross income? Given that the median household income is $50,000/year, or $4,166.67/month, you find it hard to understand that people can't find houses cheap enough to make their PITI be $375/month?

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Re: Clements: Your "Number One Number"

Post by smitcat » Tue Nov 14, 2017 10:28 am

"I advise keeping total fixed living costs to 50% or less of pretax income—and yet the typical American family spends that much just on their home and car."

This 'rule' does not seem to work in a high tax state if you are self employed, not even close.
A pre tax income of 100 widgets could become 50 widgets after taxes in those cases.
But I do get what they mean by the article in general.

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Re: Clements: Your "Number One Number"

Post by jhfenton » Tue Nov 14, 2017 11:16 am

LiterallyIronic wrote:
Tue Nov 14, 2017 10:12 am
You find it hard to understand that there are not houses cheap enough to be 9% of the average person's gross income? Given that the median household income is $50,000/year, or $4,166.67/month, you find it hard to understand that people can't find houses cheap enough to make their PITI be $375/month?
:shock: No. You keep putting words in my mouth and then trying to argue with them. :?

I said that I found it hard to understand folks spending 50% of their pretax income on just housing and car. There is a huge gap between 9% and 50% that you seem determined to ignore.

Now can we let the thread stay on track?

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