Beware! Stealth Lifestyle Debt Just Ahead!
Almost exactly ten years ago we were in the process of finding and buying our current house in the suburbs. At the time we were living in our first single-family home that we had bought for $290k and had occupied for five years. We loved the little house that was located in a residential oasis close in to the big city and that was near all the hip urban restaurants and a mere seven-mile commute to my office in the skyscraper, but with a two-year-old daughter and a second on the way, we had decided it was time to move further out for space and schools. The houses we were looking at in the ‘burbs were in the range of just a bit more than 2x the price of our starter home, and I lost more than one night of sleep concerned about the prospect of this new lifestyle purchase trapping me in work forever. To manage this financial planning anxiety I did the most logical thing I could think of: I built a spreadsheet.
The resulting workbook modeled multiple scenarios looking for the optimum result from mortgage options including a single jumbo loan, or a conforming loan with a second loan in an 80-10-10 approach (avoiding PMI of course). This sheet fed into a monthly budget model that projected out over the next ten years what all of our household expenditures would look like, including target savings amounts for college and retirement. The goal of this effort was to assuage my fear that this lifestyle purchase would lock me in to my current job and high income, forcing me to trade the rest of my life for the privilege of spending eight hours or so each night in a two-story brick structure with a finely manicured rolling green lawn. Looking at this spreadsheet today it appears that I did a pretty damn good job of predicting what most of our expenses would be ten years out; I do not see many figures that are dramatically far off the mark, even after a decade of inflation (economic and lifestyle varieties). And we have also done a fair amount of cost reduction on our part—we spend much less today in many discretionary categories including eating out, clothing, and entertainment than I projected ten years ago. In fact our average monthly cash outflow is less than half of what I had projected back in 2007! (Note here: this is the result of a multitude of factors, not merely strength of will. For example, we aggressively paid down our mortgage in the first few years, shaving about $2k off of our monthly principal and interest obligation.) But there is one area that we missed badly, and it plagues my monthly Quicken budget reports to this day: stealth lifestyle debt expenditures.
It is no longer a great eureka that buying expensive houses, fancy cars, and racking up large chunks of student debt can put you behind the financial 8-ball for years (if not decades) to come. Resources like The Millionaire Next Door announced this discovery to the world more than 20 years ago, backing up the assertions with unassailable cold, hard data. So a lot of us became pretty good at avoiding these kinds of debilitating debt obligations. But the stealth lifestyle debt I’m referring to here is something more insidious and corrupting than rank overt consumer lifestyle debt. You assume this type of debt not by signing a promissory note or a credit-card user agreement, but by where you decide to live and who you decide to associate with. Stealth lifestyle debt is not a legal obligation but a practical and social one, and the latter type can be even more unrelenting in how it binds you. I’m referring here to expenditures and consumption habits that are based on accepted cultural norms, things like “donations” to school fundraisers and activities; birthday or other “special occasion” gifts to friends, neighbors, and others in your community; home aesthetics expenses (think lawn maintenance and bales of pine straw). The sociological and psychological reality is: if you live in an area where something is common it becomes expected, and if you don’t participate in it you are likely to feel poor or ostracized … or both.
Dr. Thomas Stanley wrote extensively about this phenomenon in both The Millionaire Next Door and in his later book Stop Acting Rich. In the latter work he said this:
“What we don’t realize is that the true cost of living in certain homes and neighborhoods is unseen but truly devastating. I believe the greatest detriment to building wealth is our home/neighborhood environment. If you live in a pricey home and neighborhood, you will act and buy like your neighbors. In other words, human beings have an innate tendency to act and be like those around them—to fit in—and even to compete (in a neighborly way, of course). The type of home we live in and where we choose to live often takes the greatest toll on our financial wealth, and from it, all other perils flow. . . . Real and actual millionaires understand that when you live in a luxury house, you are also buying a luxury lifestyle. Included in this lifestyle are the social pressures to redecorate frequently, join the country club, and send your children to private schools.”
Stop Acting Rich, pp. 42, 56. Dr. Stanley then proceeded to present reams of data that proved beyond any reasonable doubt the accuracy of the thesis.
A Big Factor In Stealth Lifestyle Debt: Kids
In our personal experience the largest component of stealth lifestyle debt is our kids. There are two parts to this: first is simply the baseline cost of children—i.e., how much it costs to fulfill your legal obligation to feed and outfit the little crumb-snatchers. Second is the increase in cost above this baseline amount based on the zip code you choose to live in. Our discussion here is focused on the second component, but before moving on I cannot resist pointing out that there are a lot of folks that are ignorant of the first component (willfully or otherwise) until it is too late. But the data regarding just the baseline cost of raising kids is readily available—and it is in itself staggering. A recent government study estimates that it costs on average approximately $233,000 to raise a child from birth to age 17—that is, not including college! (For more on the college-cost topic, see this post.) In our area we see a lot of our peers add child #3 to the family as a trendy accessory; at a baseline cost of nearly a quarter of a million dollars, that’s a lifestyle acquisition that is going to dramatically impact your prospects for financial independence. But even if you are informed and responsible enough to have entered into parenthood with a full understanding of the baseline financial impact of having children, the stealth lifestyle debt component of having kids in the house is much more difficult to foresee and avoid.
Calculation of the Joe Freedom Household’s Stealth Lifestyle Debt
Our stealth lifestyle debt falls mainly not the categories of miscellaneous expenses for the kids and their schooling; housing maintenance; and gifts. Here is an exported Quicken category report for the prior 12 months showing totals for the various relevant budget categories:
Calculation of the stealth lifestyle debt amounts:
Gifts Given: I estimate that our kids attend on average 3.5 birthday parties a month. In our area extravagant birthday parties are considered a basic human right. We’re talking petting-zoo-in-the-backyard kind of birthday parties. And kids expect one each year. Every year. The going rate for a socially acceptable gift is in the $25-50 range. If I am able to keep us at $25 a pop, this works out to $87.50/month. I think I’m about as hard-core frugal as they come, but you can’t tell your kids they can’t go, and you can’t send them and subject them to social ridicule by their peer group for not playing by the gift-giving rules and norms. This might as well be an additional $125 each month on my mortgage (grossed up to account for the reality that birthday gifts are not tax deductible!). But nevertheless, not ALL of this amount is SLD. I estimate that 2/3 of it is, so I’ve included 66% of the total in the SLD figure.
Lawn Care: The data above comprises a 12-month period when I was semi-retired and not employed for 70 hours a week as a corporate attorney for more than half of the year. So I was doing my own lawn maintenance (I do get funny looks from many neighbors as they drive by; Mrs. JF swears that she has seen some of her cohort drive by and give her a look that says “You poor thing, I’m so sorry!”). But we still spent $384 on this imminently do-it-yourself-able task! Included in this is the heavily negotiated $35 that I had to spend on pine straw two weeks ago. Mrs. JF wanted 50 bales. I wanted zero. We settled at 10. (It may appear that I got the better of this negotiated resolution, but I assure you I’ll pay for it three-fold elsewhere! And just a reality check here: this stuff falls from the trees, so why would I pay $3.50 for big chunk of it?) Just for perspective: a Quicken report shows me that in 2011—a year of full-on fire-hose income for us along with the obligatory 70-hour workweeks—we spent $1,675.12 on lawn care. This included $215/month for lawn maintenance service for the seven hottest warm-weather months here in Freedomville. So to get an accurate long-term SLD figure here, I applied a factor of 250% to capture these prior periods where we spent much more on lawn care.
Housing: Maintenance: Not all of this is stealth lifestyle debt because obviously some level of maintenance expense will always be incurred no matter where you live (and even if you rent, but I digress), but I estimate that our maintenance expense is magnified at least 2x as a result of our obligation under our implied social contract to keep our house looking at least as nice as the Joneses (and likely even required by our explicit legal obligation to the HOA). So I have applied a 50% SLD factor.
HOA Dues: Originally I thought that living in a neighborhood with some rules regarding general appearance and maintenance would be a very good thing, and in theory I’m not saying I disagree today. But I don’t think it’s worth $650/year. And just wait until there is a special capital project and related assessment. This is 100% SLD.
Kids: Miscellaneous: We receive on average two requests per week for money for something related to our kids’ activities and schooling. Examples:
–Teacher gifts and gratuities: Our kids go to the local public schools, and every year we get a room-mother that appears to be compensating for Public School Guilt (the shame experienced from the fact that she neglects her kids by sending them to public schools) by heaping gifts upon the teachers. Contributions are required for birthdays and at Christmas (excuse me, “Winter Solstice Holidays”). If the teacher’s birthday is during the summer months, they will ask for contributions for a “half-birthday” celebration that falls during the school year. Food will be brought in, gifts will be presented, and the kids will be plied with sugar. This is a great use of our resources including otherwise valuable instructional/learning time. (Note here: We value our teachers very much, and we show them that by supporting them with our time for activities where they need us to participate, and by making sure that our kids are doing what they should do here at home to be productive and engaged students during the day.)
–Public school private foundation contributions: Our public schools (both elementary and middle school) have related private foundations to which we give $150 per child each year, for a total of $450 in 2016.
–Sports teams donations: The sports teams at our church impose a mandatory (but not stated as such) donation of $5-20 per head for mission work on top of the $150 per child that we pay to participate. (Don’t read anything anti-spiritual here—I’m a devout supporter of the initiative—just pointing out the additional stealth lifestyle debt amount).
–Swim team expenses: What extra costs are incurred to host a swim meet other than a crappy loudspeaker and some tattered flags to string across the shallow end? A lot apparently, including a phalanx of semi-professional college swimmers to teach little Billy to swim the back-stroke in between binge sessions at the candy bar.
From this data I calculate an annualized stealth lifestyle debt amount of $7,577.15. Over a 22-year period of living in this area (the current plan based on anticipated depart-for-college dates), and presuming an annualized return of 7% (compounded semi-annually), that would cost us a total future value of $396,973.86.
Admission of Error
I don’t think it’s possible to get all the variables right on the path to financial independence, and we made a bit of an unforced error with this one. As a result of where we decided to locate, we now have significant stealth lifestyle debt and there is not much I can do about it. It could be much worse: we never succumbed to the peer pressure to drive $50k “strut” cars or to buy a second home at the beach, but nearly $400k over 22 years is nevertheless significant leakage. While I anticipated and mitigated the financial impact of the house itself, I failed to fully appreciate the future financial obligations that would be incurred as a result of the area where we chose to live and raise our family. I suspect that I neglected to accurately assess this factor because personally I am almost completely socially indifferent—that is to say, I could avoid the entire SLD obligation by ignoring the social norms and being just fine with the consequences (I might even enjoy it a bit). But not so for Mrs. JF. She largely adheres to social norms; that’s probably why she’s a lot better than me at keeping friends. So for her psychological well-being and for the well-being of the kids, we are obligated to shoulder the SLD burden.
Is There a Fix?
We could of course relocate to a lower stealth lifestyle debt area; that would be the obvious answer. But after living in this environment for nearly 10 years it is all that our kids have known. We came here with the objective of allowing them to do all of their schooling in one place, in one house, with one set of friends. We want to stick to that plan. And I also have to admit: I mostly like it here. It’s a very comfortable place. When I have reason to tour through areas of lower property values and presumably lower stealth-lifestyle-debt obligations, I realize that I would have a hard time moving back down the ladder. This is irrational and counter-productive I know, but it is a psychological reality that it’s much easier to avoid moving up the ladder in the first place than it is to move down the ladder. The wisdom to be gained here is that the optimum approach is to avoid moving too far up the stealth-lifestyle-debt meter in the first instance.
Final Optimism and Sunshine
Don’t get the wrong idea here. I’ve known about our stealth lifestyle debt for a good while now, and I have largely planned for it in our big-picture financial (independence) plan. But even though we are equipped to deal with it, the obvious inefficiency and irrationality of spending on stupid sh!t just because you are a citizen of a population that has collectively decided to do so is tough. Writing about it here is serving as a form of therapy. And I do still pick and choose occasions to push back on the group-think social pressures, and these situations serve as good instructional moments for the kids to learn to think independently and be confident in your decisions … even if you are a group of one.
I would love to hear about some of your SLD obligations in the comments. Maybe this can serve as group therapy.
Post-script note 1: On more than one occasion we have been invited to birthday parties where the host expressly and explicitly indicated “absolutely no gifts please!”, only to see people show up with gifts. So the best intentions of the rational host were thwarted. (Am I the only that thinks it is odd to bring a birthday gift to a 42-year-old man/woman?)
Post-script note 2: I continue to use Quicken as my personal finance book-keeping app because (1) I find it much more customizable to my needs than other popular apps such as Mint.com and Personal Capital, and (2) I have 17+ years of data in my Quicken data file that is just too interesting to let go of (not to mention necessary for future tax reporting since I have 17 hears of taxable account stock basis data in there). But I am an avid user of Personal Capital for portfolio tracking and allocation; it is clearly the best tool for this purpose.