Golden Cage/ golden cuffs... avoiding it!

[Deleted]

The thread about if $250,000 is rich and the different responses made me think about the trap of the "golden cage/golden cuffs"/

I remember reading an article a couple years back about this couple that was making a nice chunk of money (300k or so combined) and they had to face reality when they realised that they had to pay for the purchase of a new washer/dryer with a credit card.

Yes I know we advocate using credit cards a long as you pay it off each month or zero percent interest... but in their case this couple was making 300K but had no money saved, none. And they realised it was a problem when they could not even afford a washer/dryer cash.

It is the same with the 2 income traps, you start making money as a couple and you spend it. You start making that money and you start spending it... until your realise your expenses are equal or even exceed your income.

So you
- cannot quit your job for less stressful one because you need the money (my uncle comes to mind, the man is really one step away from a heart attack)
- get used to a certain lifestyle and hard to cut back until you are laid off and wow... rude awakening.
- expect to have the same lifestyle in retirement but did not save for it or take into account that you will not be making the same amount
and the list goes on.


So how did you avoid the Golden cage or 2 income trap? Or how do you plan to get out of it?

For me it is the 2 income trap and we are working on it. It is mostly difficult now because my wife student loans comes up to $738/month and $1072 every 3 months (one loan is a quarterly payment) so makes it harder to cut back but the goal is to eventually live off 1 income.

To make that happen we want to get rid of our
- credit card debt ($250/month)
- my car loan ($450/month)
That would save us $700/month... hopefully will reach that by 2013

Most importantly: increase income but keep expenses same/minimum. So if we get a raise don't run out and spend it.

[Deleted]

We never got up to spending both incomes. We budget based on my fiance's income and saved mine for the wedding. Therefore when I stop working to go back to grad school all the debt we will go into is the tuition. We are making some cuts now (using coupons) to keep are budget low and save for school.

[Deleted]

It's all in the fixed expenses. It becomes a trap when you can't cut the expense out or cut it back easily. So, first there's the rent/mortgage. Don't max that out unless you're willing to cut back on everything else. It's the hardest to change. Then there are car payments if you borrow or lease. Since many of these loans go on for years and the car depreciates as soon as you drive it out of the lot, if you try to get out of the car loan by selling it you're likely to be upside down.

The rest are more discretionary but can be hard to get out of- cell phone bills, for example, or credit card debt.

DH and I moved to a LCOL area and got a mortgage that was about half what I had in NJ. While some of the extra money has gone to travel and electronic toys, the vast majority has gone to savings. If we splurge, it's with money we already have. Other than the mortgage/property taxes and the monthly cable/Internet/phone bill (all one provider), we have no fixed monthly obligations.

You also have to watch the extra costs associated with a bigger house, a better car and more possessions. Bigger house = more property taxes, higher insurance costs, higher utilities. More expensive car = higher insurance, frequently higher fuel consumption.

[zibazinski]

I have always lived frugally so even though DF is paying cash for a house, it is MUCH less house and MUCH less money than he wanted. But it's plenty big for us. I'd rather less basement (finished) and a bigger master and master bath but it isn't the end of the world. I have always budgeted so I shop at cheaper places like Walmart for canned goods because it's the same label both places but less money there so staples are at a cheaper store. That being said, I don't compromise on the quality of food, fresh food, so I don't buy that at Walmart. I turn on heat and ac when it is too hot or cold to stand it anymore or DF complains. I am able to save between 5-6 hundred bucks a month that I put in my savings account by doing those things.

[Deleted]

Mar 28, 2011 10:07:00 GMT -5 @athena53 said:

It's all in the fixed expenses. It becomes a trap when you can't cut the expense out or cut it back easily. So, first there's the rent/mortgage. Don't max that out unless you're willing to cut back on everything else. It's the hardest to change. Then there are car payments if you borrow or lease. Since many of these loans go on for years and the car depreciates as soon as you drive it out of the lot, if you try to get out of the car loan by selling it you're likely to be upside down.

I agree with the fixed expenses... we realise 4 months in that our current apartment was out of our league but we have to wait till the lease is up this June to move out.

If it was a house, we would have been screwed

[shanendoah]

I think most people (not most people on this board, most people in RL) don't even realize they're falling in to the trap. They get their annual raise or a new job and all the extra money they thought they were going to have just seems to evaporate.
For us it was a new, more expensive house much closer to our jobs (I don't regret this in the least), a second car (could have been better planned for, but I'm still glad we got it), and more dinners out. Or spending on premium groceries, a few new computer games, etc.
We got a wake up call when DH lost his job. Luckily, we weren't far enough down that we couldn't pull ourselves up, and that's what we've done. Combined with getting ourselves out of consumer debt, I also finally got a promotion and now make alone what we used to make combined. However, we're still saving more than we ever did before. My new ways to handle raises?
I set my 403(b) contribution to go up at the same time I get a raise.
When I get my raise (end of April) I will re-evaluate our budget to make sure its still meeting our needs, and then put pretty much all of the "extra" money toward SL payoff and savings.
When DH gets a job again (someday), I expect we will pound down remaining SL debt, bulk up his retirement savings, and save for home rennovation projects.

Mostly, I think being completely aware of all the money that comes in to our house and where it goes helps tremendously. Due to inflation, I will probably need to increase our grocery budget and our car budget (gas) not this year but next year. Since I track where our money goes, though, I'll have the data I need to make the changes.

[giramomma]

For us, we only budget on one job.

It's about having some discipline. It's also about figuring out your priorities. No one can "have it all" all the time. I think people have forgotten that.

With some things, we look like we earn more than we actually do. We take 3 weeks of vacations every year. We send our kids to private school. We live in a house that is worth 5x the gross salary that we budget off of. I should be able to retire at 55. We can "afford" the SAHP lifestyle. Our kids have extra activities outside of school.

However, in exchange for that, we don't keep up with technology. I have an mp3 player and a prepaid cell phone. We have $20 cable (which we will be stopping soon). We go out to eat once or twice a month. We have ONE computer. We actually have 2 tvs, which is a splurge. No gaming systems in the house. I dress my kids as cheaply as possible. I just bought myself two items of clothing..the first in about 7 months. We take alternate modes of transportation as much as possible.

It's never how much you make. It's what you do with it.

[azphx1972]

I think it's important to try to avoid lifestyle creep by knowing what you truly need to be happy, especially if you're in a field where the gravy train can stop at any moment. For me, the pain of having to get up for work every morning was enough to motivate me to save as much as I can. Also, most people on here probably consider financial security to be more important than satisfying every want, and have come up with a plan to achieve their goals. People who make good salaries but live paycheck to paycheck probably don't have a plan, and either don't know where they want to end up, or never bothered to create a map to their destination, so they're going to wander all over the place and get lost.

[achelois]

Don't try to keep up with the Joneses.

Save first. Then keep fixed expenses low.

My 403b is fully funded first, then taxes come out, then I save half that net--THEN I budget for living expenses.

[thyme4change]

I feel so bad for people when they realize what they have done to themselves. I know people think that my husband and I must be bad at our jobs because we have so little to show for it - at least that they can see. But then we start talking about summer camp or the fees for the kids to play baseball and they start getting stressed out about paying for it, and I don't care that their house is twice the size of mine and coated in gold and marble and they've never owned a car long enough to have to buy a new set of tires.

I feel that we have gone too far in one direction. Not only could one of us lose our jobs, but the other one could take a 25% paycut, and we would still be able to afford our house, our cars and save a respectable amount of money. We would never vacation, get new clothes or eat out at fancy restarants - but we would have a perfectly decent life. That doesn't mean that we are saving 60% of income now. It just means we get to piddle away a bunch of money without thinking about it.

[Deleted]

Knowing that there is a trap is 90% of the solution.

[Deleted]

Mar 28, 2011 10:31:46 GMT -5 ArchietheDragon said:

Knowing that there is a trap is 90% of the solution.

Thank you Archie, you just gave me hope.
Now I need to figure out the remaining 10%

Karma

[thyme4change]

Archie is right - just having it in mind to not spend every dime will help a lot.

We had to live "skinny" because we had a bunch of debt. A lot of our income was going towards that. Then we paid it off, but we wanted to get money into savings because my husband wanted to go to law school. So, we lived the same and put the previous debt paydown into savings. Then, my husband was in law school and had no income, but I was doing okay, so we upgraded our house - still small but a nicer neighborhood. And then, my husband graduated and got a term clerk position - which means he was going to be looking for work in 12 months. So, we didn't upgrade. And then he found a job - and we figured we had been having a nice little life in our house for the past 4 years. So, we would stay and up our savings. 6 years later, here we sit. Money in the bank, and options, options, options.

[TrixAre4Kids]

Mar 28, 2011 10:31:46 GMT -5 ArchietheDragon said:

Knowing that there is a trap is 90% of the solution.

Karma. I was blindsided. Experience is a darn fine teacher.

[so1970]

we never got into this trap because we started out our marriage with certain rules. today people just jump into a relationship thinking love is enough and every thing will just fall into place. our biggest obsticle was that for most of our lives we paid cash for everything,then when we finally decided to buy a house we had no credit history. so one extreme was as bad as the other.

[Deleted]

Mar 28, 2011 13:04:34 GMT -5 TrixAre4Kids said:

Mar 28, 2011 10:31:46 GMT -5 ArchietheDragon said:

Knowing that there is a trap is 90% of the solution.

Karma. I was blindsided. Experience is BA darn fine teacher.

Yep, the only good side to us moving 3 times in 3 years, we know now what we can afford, what to expect for that price and limit our wants and focus more on the needs.

[cronewitch]

I avoided it first when young and married because I married a man who hated debt. He didn't mind spending but didn't like payments, wouldn't have a credit card or even a checking account. So I was used to cash only and was 34 when I got my first credit card. I didn't like the idea of payments so when I charged something I wrote the check to pay it off and didn't use it again until I got the statement.

I drag my feet about signing up for monthly payments because they are so hard to stop. I used a dial up modem years longer than younger people and only got a cell phone 3 years ago. I don't sign up for texting or internet on the phone so keep the bill low. I know I could get spoiled fast buying a phone plan with apps, IPads are cool, apps aren't free so I don't have IPad or IPhone or any thing like that until I am sure I want to pay the rest of my life.

I am paying for cable tv and internet but I use it all the time, I have a cell phone but with tax it is about $36 a month and I gave up my home phone to get it. I could cut back and use a burn phone but I am not where I need to.

To pay my basic bills cost me about 1,600 a month for mortgage, insurance, taxes, bills. I want that to stay low. My take home pay if I didn't do 401K would be about 4K and I get about 700 from my roommate so am able to save about 3K a month unless I want to spend some extra or something breaks.

If I were to give up the cell phone and other little things I could almost live on SS and roommate income so having 540K saved for retirement will mean I am fine even with a low return. My boss can fire me today and I can live on unemployment for a long time.

[Deleted]

Mar 28, 2011 13:50:51 GMT -5 cronewitch said:

I know I could get spoiled fast buying a phone plan with apps, IPads are cool, apps aren't free so I don't have IPad or IPhone or any thing like that until I am sure I want to pay the rest of my life.

I've got an iPod Touch and it's a great middle ground. You need to be in a spot with Wi-Fi so it's not as handy as an iPhone, which taps into whatever phone system you've subscribed to, but there are no monthly fees. And many apps are free. A few have some ads that are a little pesty, but in the year I've had my iPod I've spent maybe $30 in apps- that includes an alarm clock, a Sudoku game, 3 foreign language dictionaries, some maps and a Spelling Bee app that I'm using to practice for a real one.

[Deleted]

I wish I had found these boards earlier. I found them after I bought a condo in 2006 and while my mortgage payment plus HO fees are about 28% of my income now, if I lost my job I don't think I could find another with my current salary very easily. Meanwhile I save and save. Home value is in the crapper and if I had it to do over again, I wouldn't. Luckily I love my home, but geez.

[Deleted]

Cawiau, if you paid off your SL would you be living on one income? If you were not saving for retirement?

[Deleted]

Mar 28, 2011 15:13:52 GMT -5 @gin1984 said:

Cawiau, if you paid off your SL would you be living on one income? If you were not saving for retirement?

401k contributions comes to $1,937.50/month
Student loans average out $1,200 for both of us (some monthly, some quarterly)

My wife gross $1,616/bi-weekly so regular month would be $ 3,232.

So yeah without 401k/student loans we could probably live off one income but not saving for retirement is not even an option and sadly the student loans are quite real.

[morrisr2d2]

My partner is terrible at saving money - if he handled our finances we'd have no financial security. I am too frugal, and if we always lived by my philosophy we'd wouldn't be living and enjoying life.

The compromise - since I make the bulk of the money, I save, invest, buy the house, pay the bills, etc. Partner's paycheck goes for eating out, vacations, and fun stuff. It's worked so far. He's also given in on just having one car, paid-off, that we beat into the ground. And I instantly stash bonuses every year. This approach has worked for us, and keeps a balance of financial stability yet enjoying life.

[Apple]

Even when I was married my husband did construction so I had to know how to not fall into any trap or we would have been screwed! Right now I make decent money and can afford most of my wants, but I am getting close with paying for this new house. I could stop putting money toward it tomorrow and ride out any rough times for a while, but I hope that doesn't have to happen. Can't wait til it's built and this house sold though, it will be a huge financial weight off my shoulders.

athena--good luck on the spelling bee! DS has gone to state twice (the only two years his school participated). He hasn't won state yet but it's been fun (he doesn't study, he's just an avid reader and good speller).

[TrixAre4Kids]

Mar 28, 2011 14:53:24 GMT -5 @jupiter42 said:

I wish I had found these boards earlier. I found them after I bought a condo in 2006 and while my mortgage payment plus HO fees are about 28% of my income now, if I lost my job I don't think I could find another with my current salary very easily. Meanwhile I save and save. Home value is in the crapper and if I had it to do over again, I wouldn't. Luckily I love my home, but geez.

Your mortgage/income ratio is a bit higher than mine, I'm at 26% without a roomie, and 23% with. I never dreamed at 30 that I'd have a roomie at 55! Can I get a do-over please?

[Deleted]

Do you remember in the Millionaire Next Door where there are 2 doctors earning around a half million a year and only one of them is going to be able to retire? I don't think a lot of high earners realize how much in retirement they need to replace their incomes if they are spending it all.

[Deleted]

Mar 28, 2011 20:54:06 GMT -5 TheHaitian said:

Mar 28, 2011 15:13:52 GMT -5 @gin1984 said:

Cawiau, if you paid off your SL would you be living on one income? If you were not saving for retirement?

401k contributions comes to $1,937.50/month
Student loans average out $1,200 for both of us (some monthly, some quarterly)

My wife gross $1,616/bi-weekly so regular month would be $ 3,232.

So yeah without 401k/student loans we could probably live off one income but not saving for retirement is not even an option and sadly the student loans are quite real.

But once they are paid off, you are almost living on one income and saving the other, 401k counts as saving, you would be about $366 short, unless you are saving otherwise. I think you are a little hard on yourself. How long before the SLs are paid off?

[backontrack]

This is by far a complete solution, but so far I have been actively planning where all of our income increases go. For many years that just meant that I got a raise and put that much more into my 401k. I also use two separate checking/savings accounts at different credit unions. A set amount gets placed into our primary account for each pay check. That amount does not change with other changes to income (raise, bonus, tax changes). The remainder goes into an account that we don’t access as often. It has mostly been used to pay off the HELOC (which was set up to purchase the house), add lump sums to the Roth IRA, or make large purchases. I’ll admit though that mentally I know when there is extra money and it makes it easier to spend because technically I can just write an account from one account to another.

Oh and as a sort of side note, since we are almost maxing out our retirement accounts I think of that as a sort of buffer. If we suddenly had medical bills or some other massive expense that the budget and savings couldn’t handle, I know that I can stop our contributions to the 401k and IRA and have added income. I took that into account when DH became a SAHD. It looked like everything would work out (and it has) but I figured if we found ourselves struggling, the retirement could suffer before we’d end up in any major predicament.

Right now I am actively planning what to do with added income. I have an added $200 a month from a raise, $400 a month because I am finally adjusting our tax withholding, and should have $100 more a month after refinancing. So, I opened the kids’ 529 plans and will have automatic deposits to that, I am going to set up automatic deposits to the Roth IRA (instead of lump sums when the money is there), and begin automatic contributions to a third account to build up some cash savings for a car purchase.

[Deleted]

Mar 29, 2011 9:24:36 GMT -5 @gin1984 said:

Mar 28, 2011 20:54:06 GMT -5 TheHaitian said:

401k contributions comes to $1,937.50/month
Student loans average out $1,200 for both of us (some monthly, some quarterly)

My wife gross $1,616/bi-weekly so regular month would be $ 3,232.

So yeah without 401k/student loans we could probably live off one income but not saving for retirement is not even an option and sadly the student loans are quite real.

But once they are paid off, you are almost living on one income and saving the other, 401k counts as saving, you would be about $366 short, unless you are saving otherwise. I think you are a little hard on yourself. How long before the SLs are paid off?

Thank you and we are working/planning on getting the student loans paid off in the next 10 years... all 140K of it.

[Deleted]

Mar 29, 2011 11:45:59 GMT -5 TheHaitian said:

Mar 29, 2011 9:24:36 GMT -5 @gin1984 said:

But once they are paid off, you are almost living on one income and saving the other, 401k counts as saving, you would be about $366 short, unless you are saving otherwise. I think you are a little hard on yourself. How long before the SLs are paid off?

Thank you and we are working/planning on getting the student loans paid off in the next 10 years... all 140K of it.

What rates are the SL?

[Deleted]

Mar 29, 2011 12:10:10 GMT -5 @gin1984 said:

Mar 29, 2011 11:45:59 GMT -5 TheHaitian said:

Thank you and we are working/planning on getting the student loans paid off in the next 10 years... all 140K of it.

What rates are the SL?

About 6% for most of them which is why I am trying to pay them off as soon as possible.