When “the basics” eat up too much of your income

Dear Liz: My husband and I are recovering from a job loss four years ago. We used up all our savings and home equity. My husband is now employed, but we are struggling to keep ahead even with a salary of about $100,000. I was a stay-at-home mom for the first 10 years of our kids’ lives and now I work two part-time jobs to help with our expenses. We are trying to follow the 50/30/20 budget plan you recommend, but can’t seem to get our “must haves” — which are supposed to be no more than 50% of our after-tax income — down from 80% to 90%. Most of the rest goes for “wants,” such as the kids’ dance classes and soccer teams and for cellphones. We’re not saving anything although we’re trying to whittle down our credit card debt. I have tried several times to refinance our first and second mortgages and home equity line of credit but have found we don’t qualify because too much is owed on our modest three-bedroom, one-bath house, which has gone down significantly in value. We also have two car loans that are worth more than the cars, and the insurance is killing us. Amazingly enough, we have never been late on a payment. We just can’t get ahead. Did I mention that both kids need braces?

Answer: You clearly can’t afford your life, and things will only get worse if you don’t get your spending in line with your income.

Your first step should be to consult with a HUD-approved housing counselor, who can advise you of your mortgage options. You can get referrals from http://www.hud.gov. If your first mortgage is held by Fannie Mae or Freddie Mac, you may be able to refinance it through the federal government’s Home Affordable Refinance Program. Recent changes in the program have helped more underwater homeowners refinance. Even if you’ve been turned down by one lender, you can try with another. One way to search for HARP quotes is through Zillow’s online mortgage quote service at http://www.zillow.com/mortgage-rates/.

The Federal Housing Administration and the Veterans Administration also have streamlined refinancing programs for their underwater loans.

Government programs usually define an “affordable” payment as one that’s 31% or less of your gross income, but that may be too high for many families to comfortably handle. Ideally, your housing costs — including mortgage, property taxes and insurance — would consume no more than about 25% of your gross (pre-tax) income.

If you exhaust your options and can’t get your mortgage payments down to an affordable level, you should consider a short sale of your home. Moving is terribly disruptive and expensive but it’s better than letting a house sink your finances.

Then take a look at your cars. The average annual cost of owning a car is $8,946, according to AAA. You can make the argument that one car is a necessity, but having two is typically more of a convenience than a “must have.” Getting rid of one could dramatically lower your insurance and transportation costs.

Since you’re underwater on both, you’ll need to look at which is cheapest to operate and which is closest to being paid off. If they’re the same, then your choice is easier — you can work toward paying that car off faster so you can sell it. Otherwise, you’ll have to weigh which loan to target first.

Another way to get your budget balanced is to make more money. That may mean asking for more hours at your jobs or looking for opportunities that pay better.


  1. This family has not thought through the realities of their financial situation if they are concerned about smartphones and dance lessons. They burned through their savings and now live paycheck to paycheck, so they are in a debt emergency and need to act accordingly.

    Refinancing the house may offer temporary breathing room, but the real issue is that they spend everything they earn. A family should never be in a position where a lost job runs up the credit cards, uses all savings, and dips into home equity. You need an emergency fund, reasonably monthly expenditures, and a Plan B-Z for lost wages.

  2. 80-90% of their $100k income is for “must-haves”? Yikes.

    I don’t understand why they’re paying for dance & soccer lessons when they’re in this much financial trouble. That stuff should have been stripped from the budget long ago. And braces are usually only cosmetic; they don’t “need” braces. I realize people want to give their kids what they never had but its so much more important that you give them a financially stable home and future. You can’t recover from financial hardship without experiencing some discomfort and going without for awhile.

    • Focusing on the small stuff won’t help if the big stuff is out of whack. Canceling the dance lessons or cell phone won’t get their budget to work. That’s why so much budgeting advice is so annoying. It pretends that if people just cut out the lattes, they could be financially comfortable. Not if your mortgage is eating up half of your income and you’re underwater on two cars.

  3. As much as it may hurt, maybe it’s time to cut down on some of the things for the kids too.

    Cell Phones are great in an emergency, but endless hours of calling and text aren’t vital when you can simply talk to the person face to face at a later time. Dance and sports would be important if the classes count for class credits, otherwise it’s just costing money that could go to paying down debts.

    If either of you go to church, you may want to ask around for help. Someone may be willing to help with food or finances for free or at least know someone else who would.

    I wish you the best of luck.

  4. I get what you’re saying Liz, but I think they should focus on both the big and the little stuff. A bunch of little things can add up, and most people would prefer to try cutting out things like lattes, phones and dance before they resort to selling their home. And like it or not, if someone came to me asking for help with refinancing their underwater home — or any other financial help for that matter — I’d question their need for help if they had a Starbucks latte in one hand and a smartphone in the other.

    • lizweston says

      When cutting small stuff could make a real difference in someone’s finances, I’m all for it. When the problem is this huge, it’s irrelevant. It’s certainly irrelevant to the lenders that will consider them for refinancing.

  5. I agree with Liz. When you’re first putting your budget together, it can be worth taking a look at the small stuff to see if you’re spending more on it than you realize. But that’s not the case for the letter writer and her family. They know exactly how much they’re spending on wants, and the amount is not excessive relative to their income.

    It’s just not sustainable for anyone – and especially not a family with kids – to cut their wants spending to zero over the long term. First, because it’s no fun at all. Second, because it’s a recipe for financial disaster. If the only way you can get your budget to balance in the best of times is by cutting out the wants entirely, then you have no wiggle room at all for dealing with unexpected expenses. And unexpected expenses are a fact of life.

  6. Nice recommendations re FHA/HUD but I wish the writer disclosed how much her mortgage was. It’s likely, based on the fact that 80-90% of money going to “needs” that they have a McMansion and need to downsize. I’m not sure I agree with cutting braces and the like. If insurance covers a portion up until age 19 and the kid is on their own after 19, think about how much it will cost the kid down the road (I paid for them myself). It’s not the kids’ fault that the parents have gotten in to trouble financially; it’s the adults’ problem and the adults should shoulder the burden for making it right. Go after the big costs, like the house and a car, first.

  7. I think the writer will have to take a really hard look at her life. It’s obvious that they are going to have to start letting go of cars and their house. I suggest they take a class like financial peace at a local church because I don’t think just getting rid of dance lessons is going to do the job. I think that they will need some individuals in similar situations helping to cheer them on to get them out of this situation….ones that will say it’s OK to not buy something new every other day. It will be hard because I’m sure your husbands co-workers are eating out daily and driving nice cars but I’m sure you can do it !

  8. Liz in Boston says

    It may be that the writer lives in a high cost of living area where housing a family of four in a three bedroom house on an income of $100K is very difficult without going over the 1/3 net income rule. I live near Boston, and my 1br apartment rent is $1700/month. It’s slightly high for the area, but I need to have both public transportation and a parking space, since my job changes frequently. If the writer lives in Boston, the Bay Area, NYC area, or similar, $100K doesn’t go very far. If they live in rural Kansas… that changes the picture. But since you don’t know where they live, don’t assume it’s a McMansion. In my neighborhood, a 2BR condo goes for $300K.

  9. Johanna says

    @Liz in Boston: The thing is, no matter where they live, there are probably families of four living there on much less than $100K.

    When people make excuses like this for why the 50/30/20 budget or other budgeting rules can’t possibly apply to them, I wonder what kind of response they’re expecting. Do they think the personal finance angels are going to come down to earth and say “Just for you, we’ll make a special exception that will allow you to live a financially balanced life even though you’re spending 50% of your income on rent and another 20% on your car payments”?

    If you don’t want to follow the 50/30/20 budget, then don’t. But the consequences you’ll face (inability to “get ahead,” as described in the letter) are the consequences of simple arithmetic, and there’s really no getting around them.

  10. Liz in Boston says

    Oh, I agree, people tend to spend much too much on what they THINK are necessities (cable, data plans, fancy cars). But folks shouldn’t assume they are living in a McMansion.
    When I wanted to cut my budget back to allow for saving for retirement (as a contractor I don’t have access to a 401K), I eliminated cable and shopping for clothes/jewelry. I also started buying shampoo, soap etc at dollar stores because it REALLY doesn’t make a difference.
    But on not getting the kids braces: that’s a case where they might be shortchanging the kids’ futures. A lot of first impressions focus on appearance, and when the kids are looking for jobs in the future, they will likely be viewed negatively if their teeth are not straight. It would be subconscious on the part of the interviewer, but appearances matter in job interviews, whether we want to believe it or not.

  11. Johanna says

    The letter writer describes her home as a “modest three-bedroom, one-bath house.” “Modest” is in the eye of the beholder, but that doesn’t sound like a McMansion. Or a tiny condo.