Making today purchases based on future income

[Deleted]

why would you do that?

A friend just bought a house and I am truly happy for him. He has achieve the "american dream" like some would say.

But he made this comment to me that raised red flags: "It might be a bit tight now financially but with future raises/promotions it will get easier".

And he might be right, I agree... but I see alot of that going on with friends: making financial decision now based on the possibility of future income.

My wife said the same thing to me the other day: Since your review is in June and mine in september, maybe we could still say here and with the raises we will still come out ahead.

Yes, but what if I don't get a raise in June and same goes for her. we are still stuck here and not saving the $400/month we would be saving if we move.

Is it the optimistic side of everyone? Knowing full well you can't afford something right now or it would be tight but hoping that a promotion/raise will come around to help you out?

I know I have made that mistake in the past, made a financial decision hoping my step mother would pay me back... 5 years later she still owes me $2,500 and I had to come up with the money by borrowing from my credit card and paying it back.

But I'll admit sometimes it does work out; but is it worth it? Like my friends running up bills for a lifestyle they cannot afford in the hopes that as they make more money they will pay all their bills quite easily.

I rather budget/spend based on my current income (with a worse case scenario included) instead of spending hoping that that 3% raise does come thru in June and september.

[NomoreDramaQ1015]

DH sometimes comments that we will be fine because he stands to inherit quite a bit of money/property from his parents. I constantly have to remind him that it doesn't matter TODAY, we need to focus on what we have TODAY.

Plus, god forbid, something could always happen to his parents that wipes out all their assests. Then I am pretty sure the gloves are going to come off once his parents die and it isn't going to be nicey nicey between the siblings like DH assumes it will.

He doesn't act on that philosphy, it just makes it hard sometimes to explain to him that we have problems that need fixed because in tomorrowland we'll be sitting pretty. Drives me nuts because in every other aspect of life he is a today, but the one place I NEED him to be a today he is a future.

[Deleted]

We did that when we bought our house. We knew it was going to be tight when we bought it. It was above the price range that we were looking in. But we thought we thought that DW would be making more money in a new job in the near future and that I would be slowly increasing my income.

[Deleted]

Apr 29, 2011 10:46:42 GMT -5 NomoreDramaQ1015 said:

DH sometimes comments that we will be fine because he stands to inherit quite a bit of money/property from his parents. I constantly have to remind him that it doesn't matter TODAY, we need to focus on what we have TODAY.

Plus, god forbid, something could always happen to his parents that wipes out all their assests. Then I am pretty sure the gloves are going to come off once his parents die and it isn't going to be nicey nicey between the siblings like DH assumes it will.

He doesn't act on that philosphy, it just makes it hard sometimes to explain to him that we have problems that need fixed because in tomorrowland we'll be sitting pretty. Drives me nuts because in every other aspect of life he is a today, but the one place I NEED him to be a today he is a future.

Sounds like my wife in a way.

She does expect to inherit everything her mom has but we need to live and plan for TODAY, her mom is quite healthy and might be around for another 20 years or so (knock on wood, she just turn 62). And who knows, like you said, something might happen and whipe out every penny her mom has.

So I am not going to plan based on what may happen in 20 years, I am planning based on what I have now or the raise I might get next year.

[jk70]

I just recently bought a house (close May 18th) and I took the past few year's worth of budgets and averaged the main categories. I then kept my income the same but increased all the averages to reflect that they won't go down in the future (ie, we spend ~$800 in groceries now but with 2 young children I upped that to $1,350). I also assumed my $506 car payment would never go away even though it is done in 36 months because there always seems to be something else.

Anyway, after adding up all the projected yearly expenses (including savings) I divided by 12 and came up with a number for my monthly expenses. I then subtracted my net income, not gross, and whatever the ending balance was was what I could afford for a monthly payment on a house that included taxes and insurance.

I also once had my Dad say that he was going to be a major help in my children's education. Thought about it for awhile and determined that the best route was to assume that wouldn't happen. So, now I have a monthly contribution to their 529 plans

[Deleted]

Apr 29, 2011 10:56:59 GMT -5 ArchietheDragon said:

We did that when we bought our house. We knew it was going to be tight when we bought it. It was above the price range that we were looking in. But we thought we thought that DW would be making more money in a new job in the near future and that I would be slowly increasing my income.

In your case it work out but was the new job a guarantee?
Also did you have a back up plan in case it did not work out as you plan?

[Deleted]

Buying on speculation... its all the rage...

[Deleted]

Yes... i will say that college savings is one of the places where i'm banking on g-pa's verbal promises... if that doesn't pan out, we will have to scramble a bit... but that isn't a 'necessary' ...

[iono1]

I think a lot of people buy a house with this thinking-and it makes perfect sense!
The idea is that because of current economics, either low mortgage rates or lower home prices than are anticipated in the future, you get in now and lock into your mortgage payment, rather than risk not being able to afford it down the line. Whether you stay in it forever or not, you're (hopefully) building equity.
With mortgages, you're dealing with a long term instrument, it's not like going on a spending spree on something that will be gone in a year or two. If you get a 30 year mortgage, you better be expecting future raises and to lock your payment in long term, is a good thing. In reality, locking into that house, as long as it's not short term and you plan on staying for at least a number of years that make it financially viable, is as good an investment toward retirement as putting money into a retirement fund. I'm retired with a paid off house. When I bought it I had a $600/month car payment and things were tight, but I wanted to get in while I could and I knew I was getting raises in the future. My current housing costs are only taxes, utilities & maintenance. Without the paid off house, I'd still be working.

[Deleted]

Apr 29, 2011 11:00:06 GMT -5 TheHaitian said:

Apr 29, 2011 10:56:59 GMT -5 ArchietheDragon said:

We did that when we bought our house. We knew it was going to be tight when we bought it. It was above the price range that we were looking in. But we thought we thought that DW would be making more money in a new job in the near future and that I would be slowly increasing my income.

In your case it work out but was the new job a guarantee?
Also did you have a back up plan in case it did not work out as you plan?

No, the new job was not a guarantee. But she was in school, virtually not making any money, so we hoped that she would be able to find a decent teaching job.

The backup plan was to live tightly on my salary only.

[phil5185]

A friend just bought a house and I am truly happy for him. He has achieve the "american dream" like some would say.
But he made this comment to me that raised red flags: "It might be a bit tight now financially but with future raises/promotions it will get easier".

If you spend-in-the-future for consumables, your income will always be a few months behind your out-go and you will be forever poor.
If you spend-in-the-future for investments, your probability of becoming wealthy is increased. Ie, using risk/leverage make it probable to become wealthy in the 30 to 40 yr career life that most of us have.

To put it in the vernacular - "millionaires often drive older cars".

[Deleted]

But, within reason, it could make sense to spend-in-the-future for a house then?

[sil]

Making today purchases based on future income

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No, but I do plan future purchases based on projected future expenses.

For example, when the kids are in school full-time, then I'll reconsider buying a house.

It's still a bit of fortune-telling, but my goal is to keep expenses level (plus COL hikes) while Income rises.

[Deleted]

I spent a huge portion of my income on my first house and grew into it within a few years. In the beginning I rented out a room to help out. Man I wish I had that $380/month house payment back! The plan didn't work as well with house #2 and it's $1600/ month payment after I got divorced and income plummeted.

[Regis]

Two words: risk management.

[ty]

Apr 29, 2011 11:00:14 GMT -5 oped said:

Buying on speculation... its all the rage...

[MN-Investor]

We didn't exactly spend more on the house than we could afford when we bought it, but we did buy it with the idea that our incomes would be going up and we would be able to better furnish our house and put more into investments as the months went on. But this was 1980 when prices of homes were going up, up, up and inflation was going up, up, up and our salaries were going up, up, up. And it did work out very well for us.

[resolution]

I did the same thing to buy my house. I was definitely impacted by my parents' history of stretching to buy houses and then getting all their money back and more when they sold. It was tight the first couple of years until I got some raises, but I had a friend move in with me and that helped out with the expenses. I loved living in that house and never regretted the difficulty of the first couple of years.

ETA: now that I am older and more cautious I am not advocating this for others, just that it was a good experience for me.

[busymom]

You can no longer assume you will have more money one year from now. You cannot even assume your employer will schedule you for 40 hours a week. (My employer has dropped non-management full-timers to 32 hours per week.) If you have an adequate emergency fund, you could purchase a house, with a good down payment, and pay a mortgage that works with the budget you have right now.

We made a couple mistakes like that in our 20's. Experience is a hard teacher, but DH & I learned well from our own situation.

[Deleted]

When I bought my house, I was terrified of taking on too much. I was moving from a paid-for family owned homed where I only paid for maintenance/repairs, taxes, and insurance, and I'd only ever paid rent when I was married years before. It was a giant leap to go from that to being solely responsible for a mortgage even though my job is pretty secure (as much as a job can be I suppose), and I was certain I'd have raises in my future.

I bought my house as a *starter home*, and 10 years later I have no plans to move. I didn't care what the banks thought I could afford, I wanted a mortgage I was comfortable with. I bought less than I could *afford*, and over the years, PITI has become an even smaller percentage of my income . I love it! Principal and interest is less than $550/month. Taxes and insurance have increased ~$100/month over the past 10 years.

I'd like a bigger, fancier house, but the only reason I'd be willing to move and increase my mortgage payment is if my neighborhood changes for the worse. For now, what I don't have to spend on a mortgage, I can spend on other stuff.

I've made a lot of financial mistakes, but I believe that not stretching to buy a more impressive house is one of the smartest things I've done. Actually, when the financial crap hit the fan a few years ago, my low (in comparison to what I see others pay) mortgage payment was one of the few good things I had going for me.

[strider]

This may have worked in the 90s. This is just not the case now or ever again. I expect no inheritance and no raises. It's just something you can't count on. If I get something more then it's a bonus.

[phil5185]

This is just not the case now or ever again.

You are having an attack of 'recency' - a sure way to fail with investing.

[dancinmama]

cawiau: Your friend could be right. It all depends on how "tight" he is going to be stretching his income today and what kind of emergency fund he has.

When DH and I bought our first home, we used half of our savings for a down payment and the other half became our life long "emergency fund". I say this because it was the money we would fall back on for an emergency, but also the money we used if we wanted to buy a big ticket item like a computer, a new TV, or a car when NEEDED throughout our lives.

Living off of DH's salary for our everyday expenses without having to dip into the EF was tight at first; but in case of a true emergency we knew we would not have to turn to credit. As he did get raises, we rarely consciously changed the way we lived. We used them to pay down the mortgage and replenish or increase the EF.

In the long term, you can count on future raises to ease the pain of a mortgage - especially when housing prices and interest rates are so low. I would say that it is a little trickier today just because of the economic environment we are living in RIGHT NOW. BUT if we DO have high inflation which are usually accompanied by high interest rates and eventually increases in income, you friend eventually will be sitting pretty if he has a fixed mortgage.

In the short term (your situation) I would not count on it at all. Even if your raises come through, you are better off trying to SAVE THEM so that you too one day can have the "American dream".

[formerexpat]

Lifestyle creep based on theoretical future income is a very dangerous game to play. Not too long before you're behind the 8 ball.

You also lose the time to invest since those extra dollars are going towards the home.

[iono1]

Anyone who does not anticipate long term future income increasing is creating a horrible business model for their budget. Look at any corporate business model. My area of expertise is real estate appraisal. Virtually every property investment on a big ticket commercial property involves a discounted cash flow (DCF) analysis. If there is not an income increase, there's no reason to invest.
A family should be thinking along the same lines. If you are on the right career path, then your income must increase & your long term budget should reflect that. If your plan is for no salary increases for the next 25-30 years, or if you're older, 15 years (as in 15 yr mortgage), you better change your career plan by at least re-educating yourself and find a more lucrative career. If you plan on flipping burgers for the rest of your working life, fine, you're not in the housing market, that's a different choice than the topic of this discussion. Buying a home is an investment in the future & a hedge against inflation. Your basic payment stays the same, your income grows. In a standard DCF analysis, this would be represented as higher income with no increase in the expense line for mortgage payments-a winning situation and a good investment.
As far as investing instead of buying the home. No matter what you think, investing is just a cute term for gambling. Investing is optional. You could lose your entire "investment" if the market goes belly up. Meanwhile as long as you can afford your house payment, as long as you keep paying, your housing expense, which is fixed, does not vary and you can't end up on the street and as I've said before, once the house is paid for, you've got a place to live for pennies compared to what others are paying for comparable housing.

[oreo]

I bought my house when I was 26 and it was definitely tight. I did all of the YM no-nos including borrowing the down payment from my parents (I paid it back with interest over the next 10 years). It was the early 90s and it was definitely a good decision for the time. I wanted to move out of my parent's house and after looking around for a place to rent, the price was about the same as buying. Of course I was lucky that my parents had the money to loan to me. My house as gone up a lot in value (I remodeled too which helped) and now, almost 20 years later, the payment is way below what I could "afford". Sometimes you just have to take a leap on something and hope it works out but timing is everything. I was paying a whopping 8.7% when I bought the house (and I paid points to get that rate--what a dummy!) My current mortgage rate is 4.99%.

It is sort of like having children. I waited until I was 44 and I STILL don't know if I was 100% ready but at a certain point you have to make the decision. I could be a millionaire and probably still not think I was 100% ready!

[8 Bit WWBG]

I think we can agree that stretching to buy a house and counting on future raises to add slack is a lot different and far more acceptable than stretching to buy pretty much anything else (consumable like Phil said).

[Phoenix84]

Only thing I’d consider future income is on a house. As a government employee, our step raises are set in stone. I wouldn’t make plans based on MAYBE getting a promotion however. I certainly wouldn’t spend future income on a car or anything that would depreciate in value.

"Plus, god forbid, something could always happen to his parents that wipes out all their assests. Then I am pretty sure the gloves are going to come off once his parents die and it isn't going to be nicey nicey between the siblings like DH assumes it will."

Yeah, inheritances are pretty unreliable. Any number of things could happen. A few off the top of my head.

1. A short stay in a nursing home can wipe out everything you own.
2. A uncovered medical bill can wipe out everything you own.
3. One of your parents could die, and the other could remarry, and leave everything to their new spouse, it happens A LOT.
4. Your parents live far longer than anticipated and use up all your retirement savings, or at the very least you can’t use the money in the timeframe you “planned.”
5. Your parents have an end of life crisis and go on a spending binge.