So I'm not a big proponent of the "latte" factor. I don't think that lattes add up to much.  Maybe they do when you have low fixed costs, big income, and spend more than you make.  But when you live pretty reasonably, aren't a big spender but can't make ends meet, there usually is a bigger picture problem.  Most often the culprit?  The house or the car payments.  Usually those are out of line with the income.  The rule of thumb is 28% mortgage, 32% for payment, taxes, insurance, interest, 40% all debt payments.  That means maybe you bought a 20% home but then you spen 20% of your monthly or annual income on car payments.  Seriously car payments add up fast!  Those two things can suddenly make the budget tight and make it difficult to save and difficult to get ahead.

So on to LAL, what can I say?  Our mortgage is 25.8% of our gross salary. So we check that box.  Our PITI is 32% of our salary so technically we check that box as well.  We have no other debts so we are at 32% total debt.  I was smart enough to stop carrying our minivan loan in September 2020.  But here I am feeling the pinch and dreading cutting our lifestyle and trying to save.  So how is it playing out?  Where are we going wrong?

I think we are going wrong because we are used to living on our salary and just saving the rest.  What I mean is prior we would just save the maximum for 401k, employee stock purchase plan, or after tax into 401k and then live on the rest of our salary.  Then the bonus cash and stock would go to pay taxes and savings.  First time in our adult working lives we don't have a 401k. 

That simple change mentally makes it harder to see our deposit and getting to spend it like we used to.  Before I knew we already had automatic deductions take out for "savings".  I also knew we were not planning on spending our bonuses or counting on them so it was easy enough to do a sweep into our savings account.  Usually I also paid a higher percetange of our bonuses in an estimated payment to the government because they never withhold enough for our bracket.   So now I probably need to automate $1500/paycheck (too hard biweekly to calculate) straight to Roth IRA/ESA account and see if we can't live on that.  I think that extra 2x/year paycheck needs to go to savings and I need to scale back how much from 2 paychecks we put into our monthly savings.   This is going to be a learning process again.

I'm not a very good budgeter or tracker.  I prefer the save first and spend the rest. I also prefer to have it taken out and see only what we get after taxes.   

But here is where we are shaking out wrong

Income 100% 

Mortgage PITI 32% $60k/year

Savings Retirement 15%

Short term 5% - this if my flexible

Federal taxes 10.32%

SS/Medicare 6.36%

= Leftover 31.32% leftover  - this should be enough. Works out to around $56k/year

I just am not sure.  I think I need this year to see if we really can save 20% and live on 31%.  It doesn't seem that far off from our prior spending, but we have to be more mindful and scale back our traveling.  Also I believe where I am having trouble is realizing that we are going to be paying a lot less in taxes.  

So our house isn't "unaffordable" but it definitely makes me feel tight.  Our current salary is $180k/year.  Our mortgage is $3800/month and $1000/month taxes/insurance.  We should be able to manage to save that 20% or $36k/year.  Our mortgage is currently $850k at 2.875% 26 years left.  According to the 3x rule of thumb we are at 4.72x.  Thus we are over.  We are also at the highest end of what you should buy and probably why we are struggling with saving 15% to retirement and 5% to short term.

If we managed to get out PITI to 25% that would give us a little more breathing space on the living expenses and still save 20% comfortably.  When we bought the house 4 years ago we were at 3.7x and 22.8% PITI off of base salary.  We were also approved for a lot more house but bought something we felt very comfortable with. 

When I agreed to this salary reduction in August 2020 I knew we were going to struggle a little at first.  We hadn't been budget constrained in a long time probably over a decade since before kids.  Mostly because we were usually very conservative with our housing and fixed costs.   This is a short term reduction.  If it doesn't pan out for DH in 2 years he'll go get a regular job.  No we can't guarantee what he'll make but if it's closer to what he was making we'll be fine.  So I'm not selling the house.  Should I? 

Maybe.  But in this case it's for less than 2 years and if we can manage without touching savings and even saving I think we sit tight and give it ago.  Now in 2 years if he looks for a job and can't find one paying what he's currently making then we reconsider selling the house.   I don't think long term I want to be in this situation.  But short term we can make it work.  Also if he was making $180k long term we'd have to reconsider moving elsewhere.  Because to me that's not enough to make it where we are. 

Where we live rents are higher than our mortgage running around $4000/month.  With the tax break 24% on $25k interest and $10k property taxes we are looking at "renting" our house for $27k/year and "saving by princpal paydown" $21-22k".  So to correctly assess our interest it's $2500/month.  The principal paydown can't be equated to rent.  So the tax break also has to correctly be assessed to determine if renting is better than buying.  For us no?  If we were buying now?  Well probably yes because to buy our house now our mortgage would be at least another $1000/month more and our property taxes an extra $2-3k/year.  So an extra $1500/month would definitely put it on par with renting if not a better reason fo renting.

Anyway that's how things are unfolding for us.  Guess it'll be an interesting 2 years.