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Spend everything you make

January 19th, 2017 at 08:59 am

Okay people really do spend everything they make. You think they don't. Or at least I thought they didn't. Turns out people really do spend everything they make and then more.

I've now seen people making incredible salaries, still working, and drawing from a 401k. Paying 30% tax on their 401k withdrawal based on their income and somehow not saving. Being in their 60s and still have a mortgage with interest. I am floored.

It explains a lot about people talking about how will they retire? I mean I work in a tax office where one of the other tax people has admitted to it being too hard to save. So she gets a $8k tax refund to help them through the year make ends meet. She said it was too hard to save for college so they meant to but they never got around to it. Her kids have $8k saved at 16 and 14 and most of it was from her dad's initial contribution into a 529 of $2500. She said everything else just seemed more important.

Or another one said there's no way we'll retire before 65. My husband was hoping 60 but we have so many expenses. Apparently they have a couple of rentals that aren't really breaking even. I wanted to point out that perhaps they should cash in and buy rentals that actually produce income. But they see it as a long term investment of price appreciation. I'm not RE savvy enough but I can't help but wonder if this is a losing proposition? Sure you can write off depreciation and other stuff on rentals, but if you can't cover the mortgage with rent, I wonder if you shouldn't buy a different property?

These are supposedly financially savvy people and the clients who come in are in the top 2-3% of earners in the US. But they have very little savings. They spend it as soon as they make it.

I know we chose to live without income. But I have to wonder don't these people worry? Do they even have 3 months saved in an EF? From what I can the answer is no.

10 Responses to “Spend everything you make”

  1. creditcardfree Says:

    Yes, that is why so many Americans have credit card debt! You can know the right things to do, but if you don't do them, then you won't get the results. It is sad, but it is their choice in the cases you describe.

  2. Joe Says:

    Don't worry, the government will bail them out. Social Security will eventually be means tested. Their student loans will be forgiven and they can sign up for free or heavily subsidized healthcare.

  3. My English Castle Says:

    My brother and his wife have both retired early; my brother was a good earner, top manager, and a savvy saver. They plan very well, but even they have a lot to say about the cost of health care. It's very expensive, and my SIL had a brush with cancer making it almost impossible for them to get cheaper healthcare. Without the ACA they'd really have to dig deep.

    Several of my friends who will be 60 soon-ish still have mortgages. It's hard to resist the pull of advertising and lots of people have expenses with elderly parents, expensive childcare, and medical issues too. I agree we could all plan better. That's why a site like this is so important--to cheer each other on.

  4. CB in the City Says:

    I still have a mortgage and I'm in my sixties. It was that or rent for the rest of my life, which would have been more expensive. And I certainly have not led a frivolous life, as anyone who knows me would testify. Don't judge unless you've walked in another's shoes.

  5. NJDebbie Says:

    I used to judge people until I read this post at frugalwoods.com
    http://www.frugalwoods.com/2016/10/28/striving-for-compassion-in-a-world-of-judgement/

  6. livingalmostlarge Says:

    CB are you drawing from your 401k while still working? NJDebbie I wanted to give simple tax advice. Stop drawing on your 401k and paying 30% Tax on your 401k distribution versus just waiting until you retire. I mean seriously. You could only pay 10% tax on those distributions but why are you doing it now? Do I judge their spending? NO but I have to struggle to bite my tongue and you are killing a person doing your taxes. Because it's so tax inefficient. You explain to me how it's hard not to tell someone if you just live on what you make you can save 30% on just your 401k withdrawal. That's $6k going straight to taxes because you make $210k and pulling another $18k out of 401k and your rate is 28%. Yep flush it down the toilet. Wait until you retire and you could be paying 0% on that $18k.

    And nope the poor woman who didn't save for college, my suggestion? Apply for colleges that might provide aid. I also suggested community college, but it's not good enough for her son.

    And the rentals? Well I'm not savvy enough investor but I think losing money on any investment a bad idea. Stocks or rentals. It doesn't sound like a good retirement plan.

  7. CB in the City Says:

    No, I am retired and drawing the interest on my 403b. My work is contract work; part-time and never promised.

    I'm just suggesting you focus more on your blessings (which includes good sense about finance) rather than spend so much energy on judging others. They will learn, or not.

  8. creditcardfree Says:

    Did you give that person the tax advice? Or is that not allowed as a preparer? And just because you give them the facts, doesn't mean they will follow it.

  9. My English Castle Says:

    NJ Debbie--I love those Frugalwoods folks. It's the nicest thing about finance I've read in a long time. No shouting, no preaching, just quiet thoughtful advice.


    Living--it must be hard to see people's "bad" decisions. I wonder if a chart showing how early 401k deductions are actually dinged would help. Sometimes people hear the 30% thing and can't even figure the math.

    CB is one of my heroes for her excellent quality of life and care for others!

  10. livingalmostlarge Says:

    CCF we can't give any financial advice unless they ask for it. So you have to bite your tongue. Like don't draw from a 401k before you retire though you are above 59.5. Sounds reasonable and sane, but not something you can say. You can suggest it if they ask should I be doing this. But if they bring it in you can just stare and sigh.

    CB I honestly feel we are doing people a huge disservice. It's not like I want to say stop spending. BUT just the simple tax implications of someone still working and making $200k and drawing from a 401k is insane. This could save them $6k off the top and they could have that much more for spending. But instead they are paying the government unnecessary taxes.

    MyEnglish, I can't critisize spending because I don't know what they are spending on. But I do find it hard to bite my tongue on super simple tax savings. I don't want to say "hey contribute to your 401k." But seriously losing money on a rental seemed common sense and not paying taxes on your 401k that you've been deferring to pay the maximum tax break is crazy.

    The coworker who can't afford college, I didn't judge but I did suggest community college as a possibility. It's just not for them.

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