control finance411

Living large

Last year, a friend came to me for advice. She and her spouse have one child and, until recently, both of them worked in professional careers. My friend, who I’ll call Gail, was sick of her job and wanted to start her own contracting business. I said great, but be realistic about how fast (that is, how slow) a new business is likely to grow.

Gail’s family was used to a high standard of living, symbolized by a house with a beautiful garden. They were able to achieve this standard of living by spending all of their take-home pay on current expenses. They had no overhang whatsoever.

Once Gail quit her job, they started drawing down their emergency savings to maintain their lifestyle. In other words, the day she gave notice, a clock started ticking: her new business would have to thrive by the time that money ran out, or else.

Last week, Gail hit the “or-else” moment. The savings are almost gone, but her family is still spending like a dual-income couple. She came to see me and we put together a simple budget spreadsheet. The first thing that jumped out at me was that their mortgage payment alone was close to 50% of their take-home pay. Lenders (post-housing bubble, at least) get very nervous when that payment creeps above 33% of income, and with good reason: it’s unsustainable. You can’t be financially agile, save for retirement, and have enough fun to stay sane when just one of your non-negotiable monthly payments is sucking up half your income.

I told Gail that unless she got her old job back (out of the question), there was no way they could stay in the house. I think she was just waiting for someone to say it out loud.

We set the spreadsheet aside and I asked Gail the big questions: Let’s say you can have anything you want out of life as long as it doesn’t require spending more money than you make? Would you be willing to live in a small apartment near your spouse’s job?

I expected her to throw a drink at me, but to my surprise, she smiled. Sure, that could work, she said. She’d still have the most important thing — her family — and could say goodbye to constant worries about money.

Matthew Amster-Burton

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