Lifestyle inflation
Lifestyle inflation
A close friend and I were discussing his potential future home purchase and asked for my opinion on if he was suffering from a case of lifestyle inflation.
Friend is young (under 30) $310,000 yearly income
His spouse (also under 30) $80,000 year income
Cashflow from Rental income $53,500 per year
Total: $443,500 household income
2 young children (under 4)
Monthly expenses: roughly $6000 including mortgage.
Currently mortgage balance 400k on a home worth 800k
He’s considering purchasing a home for 1.2M and taking out a mortgage for about 1M.
He and his family doesn’t need this home, they are perfectly comfortable in their current home.
His frugal side is telling him make do with what you have, his other side tells him; you can afford it why not. What would some of you seasoned bogleheads do? Avoid lifestyle inflation at all costs or bite the bullet?
Friend is young (under 30) $310,000 yearly income
His spouse (also under 30) $80,000 year income
Cashflow from Rental income $53,500 per year
Total: $443,500 household income
2 young children (under 4)
Monthly expenses: roughly $6000 including mortgage.
Currently mortgage balance 400k on a home worth 800k
He’s considering purchasing a home for 1.2M and taking out a mortgage for about 1M.
He and his family doesn’t need this home, they are perfectly comfortable in their current home.
His frugal side is telling him make do with what you have, his other side tells him; you can afford it why not. What would some of you seasoned bogleheads do? Avoid lifestyle inflation at all costs or bite the bullet?
Re: Lifestyle inflation
If he has 400k equity in current home, why wouldn't he put down at least 20%, if not the entire 400k equity?
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Re: Lifestyle inflation
Even though mine is paid off, I now wish I owned a smaller house.pennylane wrote: ↑Tue May 09, 2023 8:19 am A close friend and I were discussing his potential future home purchase and asked for my opinion on if he was suffering from a case of lifestyle inflation.
Friend is young (under 30) $310,000 yearly income
His spouse (also under 30) $80,000 year income
Cashflow from Rental income $53,500 per year
Total: $443,500 household income
2 young children (under 4)
Monthly expenses: roughly $6000 including mortgage.
Currently mortgage balance 400k on a home worth 800k
He’s considering purchasing a home for 1.2M and taking out a mortgage for about 1M.
He and his family doesn’t need this home, they are perfectly comfortable in their current home.
His frugal side is telling him make do with what you have, his other side tells him; you can afford it why not. What would some of you seasoned bogleheads do? Avoid lifestyle inflation at all costs or bite the bullet?
I have excess space which 'tempts' me to fill it with more stuff.
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Re: Lifestyle inflation
Whats the basis for wanting to upgrade?
More space? Better school district/neighborhood? Closer to family?
More space? Better school district/neighborhood? Closer to family?
this is the definition of lifestyle creep.He and his family doesn’t need this home, they are perfectly comfortable in their current home.
Re: Lifestyle inflation
I'd imagine that's the bigger mistake then upgrading.
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Re: Lifestyle inflation
OP,
A) What is his net worth excluding the home equity?
B) Rental income, old 800K house, new 1.2M house. Too many eggs in the real estate basket. If it goes bad......
KlangFool
A) What is his net worth excluding the home equity?
B) Rental income, old 800K house, new 1.2M house. Too many eggs in the real estate basket. If it goes bad......
KlangFool
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Re: Lifestyle inflation
Re: Lifestyle inflation
Not sure, part of his long term plan is rentals, he’s had them for a long time he’s not new into the landlord scene.
Re: Lifestyle inflation
So, the reason to upgrade is to create another rental property?
Sounds like a family who is going to be strong financially either way.
I mean, he can. But it sounds like the tail is wagging the dog.
Sounds like a family who is going to be strong financially either way.
I mean, he can. But it sounds like the tail is wagging the dog.
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Re: Lifestyle inflation
Then stay in the current house and use the available credit/leverage to buy multiple rentals.
Re: Lifestyle inflation
Avoiding lifestyle inflation at all costs is dumb. If the new home would improve their lives, they can obviously afford it and should buy it. If not, don't. It has nothing to do with "needing" it.
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Re: Lifestyle inflation
How stable is the income?
Re: Lifestyle inflation
I would suggest that you step back and maybe mention some things to consider but let him make up his own mind, and maybe post here himself.
This is not a situation where a good friend needs to step in and prevent a friend from making a terrible mistake, like cashing out an IRA to buy crypto. He already has at least one other rental so that he is not clueless about what he his getting into.
Even if you give well intended advice there is a chance that it will turn out to be incorrect like if there is a depression or high inflation.
I agree, especially if he cannot come up with a 20% downpayment on his next house.
It was also not clear if he would even be able to get the financing that he needs to buy the next house with a low down payment so it might not even be possible for him to do what he wants.
If he has something like a 2.5% $400K mortgage on his current house that he wants to keep that could be part of the reason he wants to keep it as a rental. The problem with that is that by not freeing up the home equity would mean that the mortgage on his new house would be $400K larger and likely be at around 6.5%.
Reading in between the lines it sounds like in his area his current $800K house is pretty nice and well above the low end of the housing market. If that is the case then it can make finding good renters difficult since if a well qualified renter could buy a perfectly OK house for $600K most people would rather buy a house like that than rent a nicer $800k house. In a market like that even when he finds a well qualified renter he may have higher turnover as the renters needs change and they move on. He may find that many people who want to rent a $800K house really can't afford it and may have other issues.
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Re: Lifestyle inflation
I could probably name a dozen or more peers that were doing great and on financially solid ground until they weren't. Stable jobs got sold to other companies and positions axed. Solid incomes became disability payments due to unforeseeable accidents. Divorce, lawsuits, the list can go on and on.
These sorts of questions shouldn't be "can they afford it" but rather "are they willing to risk it". Is a 1.2 million dollar house worth the added risk?
Re: Lifestyle inflation
I got the house urges at one point. My home is 2500 square feet and probably below average for my town. My kids grew up visiting other Kids homes that had garages the size of my house. We could have afforded to upgrade but we are BH so there's that.
The kids have gone and now there is only two of us. I find my home very large. I mean what do i need all these rooms for and one is my home office. One of my kid's rooms is now a junk collection point that we have to deal with. I can't imagine if I had bought a 5,000 square foot home what we could have stuffed into that home.
At this point, my home represents 15% of my net worth and that's kinda how I like it.
the urge will pass if he waits.
if he wants a rental property get a rental property that makes sense (multifamily , location near a college, whatever)
The kids have gone and now there is only two of us. I find my home very large. I mean what do i need all these rooms for and one is my home office. One of my kid's rooms is now a junk collection point that we have to deal with. I can't imagine if I had bought a 5,000 square foot home what we could have stuffed into that home.
At this point, my home represents 15% of my net worth and that's kinda how I like it.
the urge will pass if he waits.
if he wants a rental property get a rental property that makes sense (multifamily , location near a college, whatever)
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Re: Lifestyle inflation
just like Dave Ramsey did but then went bankrupt at age 28?pennylane wrote: ↑Tue May 09, 2023 8:58 amBeing a landlord has worked out well for him for the last 10 years, it’s hard to tell someone they made a mistake renting out homes when they became a millionaire well before 30 years old.
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Re: Lifestyle inflation
Thanks for the input, let’s just focus on the question at hand. He doesn’t have a mortgage on the rentals.arcticpineapplecorp. wrote: ↑Tue May 09, 2023 7:38 pmjust like Dave Ramsey did but then went bankrupt at age 28?pennylane wrote: ↑Tue May 09, 2023 8:58 amBeing a landlord has worked out well for him for the last 10 years, it’s hard to tell someone they made a mistake renting out homes when they became a millionaire well before 30 years old.
PS.. whatever Ramsey claims, take it with a grain of salt.
Last edited by pennylane on Tue May 09, 2023 8:23 pm, edited 1 time in total.
Re: Lifestyle inflation
I should have clarified instead of rounding to 200k. It would be 20% so roughly 240k. It’s not a cash issue. The question at hand is lifestyle inflation and what would BHs do. Thanks…..Watty wrote: ↑Tue May 09, 2023 1:03 pmI would suggest that you step back and maybe mention some things to consider but let him make up his own mind, and maybe post here himself.
This is not a situation where a good friend needs to step in and prevent a friend from making a terrible mistake, like cashing out an IRA to buy crypto. He already has at least one other rental so that he is not clueless about what he his getting into.
Even if you give well intended advice there is a chance that it will turn out to be incorrect like if there is a depression or high inflation.
I agree, especially if he cannot come up with a 20% downpayment on his next house.
It was also not clear if he would even be able to get the financing that he needs to buy the next house with a low down payment so it might not even be possible for him to do what he wants.
If he has something like a 2.5% $400K mortgage on his current house that he wants to keep that could be part of the reason he wants to keep it as a rental. The problem with that is that by not freeing up the home equity would mean that the mortgage on his new house would be $400K larger and likely be at around 6.5%.
Reading in between the lines it sounds like in his area his current $800K house is pretty nice and well above the low end of the housing market. If that is the case then it can make finding good renters difficult since if a well qualified renter could buy a perfectly OK house for $600K most people would rather buy a house like that than rent a nicer $800k house. In a market like that even when he finds a well qualified renter he may have higher turnover as the renters needs change and they move on. He may find that many people who want to rent a $800K house really can't afford it and may have other issues.
Re: Lifestyle inflation
The friend is earning 443,500$ and spending $72,000. Let's assume that he pays $143,500 in taxes. Even then he saves 3x what he spends.
IMHO, he can afford the house and pay it off in 4-5 years. He is allowed a little bit of life style creep. If he really wants a bigger house and that what makes him happy, go for it.
I don't if I am a true boglehead but if I wanted the bigger house, I would go for it
IMHO, he can afford the house and pay it off in 4-5 years. He is allowed a little bit of life style creep. If he really wants a bigger house and that what makes him happy, go for it.
I don't if I am a true boglehead but if I wanted the bigger house, I would go for it
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Re: Lifestyle inflation
ok. well i noticed the only things we know are:pennylane wrote: ↑Tue May 09, 2023 8:19 pmThanks for the input, let’s just focus on the question at hand. He doesn’t have a mortgage on the rentals.arcticpineapplecorp. wrote: ↑Tue May 09, 2023 7:38 pmjust like Dave Ramsey did but then went bankrupt at age 28?
PS.. whatever Ramsey claims, take it with a grain of salt.
1. his equity on his primary home (not on his rentals)
2. his family's income.
but we don't know what investments he has. Are we to assume there is no 401k/IRA/taxable despite the income of two parents?
since they're spending 16% of their income in expenses, where is the other 84% ending up? (aside from whatever amount to taxes)
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Re: Lifestyle inflation
If they want the house, buy the house. I don't really think going from an 800k house to a 1.2M house is that much of an upgrade.
If they want another rental, why not just buy a place to rent out so they don't have to move?
When we were looking at houses I was eyeing the 3k-3500 Sq ft houses. My wife was eyeing the 2k-2500 Sq ft houses. We went with a 2200 Sq ft house and I am so happy we didn't choose the 3500 Sq ft houses, and it has nothing to do with the money. We don't have kids, but 2200 is a good amount more than we need. We both have good size offices in the house, 2 real bedrooms (one of which is used primarily for storage and to trap the dogs away when we need to), and we also have another room that we basically don't go into. It's a bit annoying having to clean rooms you never use, and I wouldn't want to add 3 or 4 more rooms to that category.
If they want another rental, why not just buy a place to rent out so they don't have to move?
When we were looking at houses I was eyeing the 3k-3500 Sq ft houses. My wife was eyeing the 2k-2500 Sq ft houses. We went with a 2200 Sq ft house and I am so happy we didn't choose the 3500 Sq ft houses, and it has nothing to do with the money. We don't have kids, but 2200 is a good amount more than we need. We both have good size offices in the house, 2 real bedrooms (one of which is used primarily for storage and to trap the dogs away when we need to), and we also have another room that we basically don't go into. It's a bit annoying having to clean rooms you never use, and I wouldn't want to add 3 or 4 more rooms to that category.
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Re: Lifestyle inflation
1 house, 1 spouse rule.
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Re: Lifestyle inflation
You're still young. I've known retirees who bought a large (>$1.5 million) home expecting it to be the vacation destination for their children and grandchildren. It was going to be sort of the family destination for holidays and such.
It never happened. They bought the home, but the kids haven't been coming as often as they planned. Instead, his MIL is now a permanent resident, as were his unmarried daughter and his god-daughter (who's parents live in another state). The daughter got married and moved out, and the god-daughter had to be convinced to either find her own place or move back home with her parents.
Still, their retirement is young, and the kids are growing up. Perhaps there is still time for their home to become the family "compound" that the future grandkids will remember when they get older.
But for a family in their 30s? I think there is too much uncertainty out there to assume that the cash flow today will continue into the future. At this point, when the kids are young and the home is sufficient and the expenses fit within the costs, think of the stability and the comfort of the kids first. Create a home that the kids can grow up in, and then look to upsize when they're older if your financials have kept up with time.
-B
It never happened. They bought the home, but the kids haven't been coming as often as they planned. Instead, his MIL is now a permanent resident, as were his unmarried daughter and his god-daughter (who's parents live in another state). The daughter got married and moved out, and the god-daughter had to be convinced to either find her own place or move back home with her parents.
Still, their retirement is young, and the kids are growing up. Perhaps there is still time for their home to become the family "compound" that the future grandkids will remember when they get older.
But for a family in their 30s? I think there is too much uncertainty out there to assume that the cash flow today will continue into the future. At this point, when the kids are young and the home is sufficient and the expenses fit within the costs, think of the stability and the comfort of the kids first. Create a home that the kids can grow up in, and then look to upsize when they're older if your financials have kept up with time.
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Re: Lifestyle inflation
This! When you are young you think nothing bad will ever happen. Life proves it's just a matter of time until something bad happens to everyone. Keep a bigger cushion than necessary, someday it'll be a lifesaver.I could probably name a dozen or more peers that were doing great and on financially solid ground until they weren't. Stable jobs got sold to other companies and positions axed. Solid incomes became disability payments due to unforeseeable accidents. Divorce, lawsuits, the list can go on and on.
Re: Lifestyle inflation
With everybody deciding to become landlords, is there sufficient rental demand for all these houses in the middle / higher price range?
If OP were to do this, the rental income should really cover a mortgage at todays higher rates. Otherwise they are substantially increasing their interest payments.
If OP were to do this, the rental income should really cover a mortgage at todays higher rates. Otherwise they are substantially increasing their interest payments.
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Re: Lifestyle inflation
The stability of your friend's income is the real question here. Is their employer currently planning/executing layoffs?
What about the rental(s)? Is that sustainable, given the number of units currently under construction?
In the moment, your friend can absolutely afford it. Personally, I would not take such a risk.
What about the rental(s)? Is that sustainable, given the number of units currently under construction?
In the moment, your friend can absolutely afford it. Personally, I would not take such a risk.
Re: Lifestyle inflation
Pretty much. It is one thing if they are some tech worker versus a Doctor who just finished residency. But we are talking about someone making 30k+/month and spending 6k. Even with taxes they are saving a very high amount. What do else do they want to do with the money. They could probably retire around 35 if they wanted to. They could live in a 1.2m house and retire at 45. They could spend 50k/year on traveling and retire at 40. And so on.DeliberateDonkey wrote: ↑Tue May 09, 2023 10:17 pm The stability of your friend's income is the real question here. Is their employer currently planning/executing layoffs?
What about the rental(s)? Is that sustainable, given the number of units currently under construction?
In the moment, your friend can absolutely afford it. Personally, I would not take such a risk.
There is nothing wrong with lifestyle creep. You should aim to do quite a bit of it as your income increases. Just make sure you are spending the money on things that matter to you. If that is a 100k car, 1.2m house, 50k/year of travel, and so on is up to you..
Re: Lifestyle inflation
I've always listened to my frugal side, but that's me, but I also never made anywhere near the money your friend does either so I'm sure that's affecting my view.
Re: Lifestyle inflation
I have a hard time believing that their monthly expenses are only $6,000. Mortgage payments with property taxes and insurance are probably half of that. Add the cost of food/groceries, utilities, cell phones, car payments/insurance, gas, restaurants, new clothes & shoes for the kids, gifts, etc. What about daycare for the kids? My daycare costs for two kids are close to $3K/month. Do they ever take vacations?
Re: Lifestyle inflation
This doesn’t sound like lifestyle creep, it sounds like a he’s making an investment decision brought on by a lot of good luck in the housing market. Whether he moves seems to be a matter of whether he thinks he can rent out the $800k property.
Based on anecdotal evidence, it seems like we’re going to be in a rental property crisis. Landlords can’t own every property. I see a lot of YouTube videos where people pitch being a landlord as a get rich quick scheme. I guess it’s working out well for the OP’s friend, but get rich quick schemes rarely end well.
Re: Lifestyle inflation
I’ve always wondered what the market is for more expensive rental homes. Is there a market for people paying $2500 a month or more for rental homes? I would think most people who could pay that much would prefer to buy.gtrplayer wrote: ↑Tue May 09, 2023 11:27 pmThis doesn’t sound like lifestyle creep, it sounds like a he’s making an investment decision brought on by a lot of good luck in the housing market. Whether he moves seems to be a matter of whether he thinks he can rent out the $800k property.
Based on anecdotal evidence, it seems like we’re going to be in a rental property crisis. Landlords can’t own every property. I see a lot of YouTube videos where people pitch being a landlord as a get rich quick scheme. I guess it’s working out well for the OP’s friend, but get rich quick schemes rarely end well.
Re: Lifestyle inflation
Depends where you are. My kids in their late 20s have been paying $2k a month for a 2 bedroom apartment. Another has been paying $2600 for a 1 bedroom in downtown. They don't have money for a down-payment yet and a rental house in the area would run them probably $4ka month. Also, they aren't all totally settled in the area so buying a home here might not be the right move anyway.
Re: Lifestyle inflation
There’s nothing wrong with lifestyle creep if you can afford it. I would venture to say most people are working hard to advance their career and earnings so they can afford lifestyle creep. The thing that matters is that you have an end goal in mind and a path to achieve it. Don’t let lifestyle creep make obtaining your goals an impossibility.
Re: Lifestyle inflation
My thoughts exactly. May be possible if no daycare (if spouse is a nurse taking night/weekend shifts).safari wrote: ↑Tue May 09, 2023 11:08 pm I have a hard time believing that their monthly expenses are only $6,000. Mortgage payments with property taxes and insurance are probably half of that. Add the cost of food/groceries, utilities, cell phones, car payments/insurance, gas, restaurants, new clothes & shoes for the kids, gifts, etc. What about daycare for the kids? My daycare costs for two kids are close to $3K/month. Do they ever take vacations?
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Re: Lifestyle inflation
There could be a thread of real-life examples of what happens to people, for those who may not have known people who fell into misfortune. Not to dwell on the negative but I find such stories illustrate good lessons.SavinMaven wrote: ↑Tue May 09, 2023 9:47 pmThis! When you are young you think nothing bad will ever happen. Life proves it's just a matter of time until something bad happens to everyone. Keep a bigger cushion than necessary, someday it'll be a lifesaver.I could probably name a dozen or more peers that were doing great and on financially solid ground until they weren't. Stable jobs got sold to other companies and positions axed. Solid incomes became disability payments due to unforeseeable accidents. Divorce, lawsuits, the list can go on and on.
Actionably, I think “why not?” isn’t a compelling reason to buy a $1.2 million house.
Re: Lifestyle inflation
I always think it'w a little weird or creepy to be discussing 3rd parties that have not personally posted a question to this board. That said, if it were me, I'd stay put, because living below my means is a Boglehead and "millionaire next door" bedrock philosophy. But then I'm just me!
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Re: Lifestyle inflation
+1lthenderson wrote: ↑Tue May 09, 2023 2:00 pmI could probably name a dozen or more peers that were doing great and on financially solid ground until they weren't. Stable jobs got sold to other companies and positions axed. Solid incomes became disability payments due to unforeseeable accidents. Divorce, lawsuits, the list can go on and on.
These sorts of questions shouldn't be "can they afford it" but rather "are they willing to risk it". Is a 1.2 million dollar house worth the added risk?
It sounds like it's lifestyle creep, rationalized by "look how great we did renting the other home".
If they were looking at a new home in a better location/ school district, or needed more room for the kids, and it was just a slight bump in price, it might be advisable.
It will probably work out fine. Until it doesn't, as thenderson points out.
Cheers
Re: Lifestyle inflation
I get the feeling the friend does not quite know what to do with his money or time and since he is affine to real estate, the next project is a bigger house (like bigger cars, bigger TVs, newer phones) - that to me is the lifestyle creep
You should direct your life to projects that are either truly needed (subjectively of course) or provide fun, just upgrading for marginal gain seems a waste of life time (waste of money is secondary), it's a question of efficiency curve to me.
But since he is a friend, I would also stay the hell out of that decision - there is nothing you can possibly gain from commenting and it's not like he is running into an open knife and you need to prevent serious damage.
You should direct your life to projects that are either truly needed (subjectively of course) or provide fun, just upgrading for marginal gain seems a waste of life time (waste of money is secondary), it's a question of efficiency curve to me.
But since he is a friend, I would also stay the hell out of that decision - there is nothing you can possibly gain from commenting and it's not like he is running into an open knife and you need to prevent serious damage.
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Re: Lifestyle inflation
Latest median rent data...
CA: $2980
NJ: $2661
NY: $2520
WA: $2295
FL: $2247
The answer to your question would appear to be yes.
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Re: Lifestyle inflation
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Re: Lifestyle inflation
Near my office, where I take my lunchtime walks, there is a 5/5.5 house for rent for $9,500/mo. It won't last long on the market, either. If I wasn't working from home today, I'd snap a pic for you.
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Re: Lifestyle inflation
The old "asking for a friend" post.windaar wrote: ↑Wed May 10, 2023 5:39 am I always think it'w a little weird or creepy to be discussing 3rd parties that have not personally posted a question to this board. That said, if it were me, I'd stay put, because living below my means is a Boglehead and "millionaire next door" bedrock philosophy. But then I'm just me!
Re: Lifestyle inflation
People are just out of the loop at how much real estate costs in HCOL areas. When a 3/1 1000 sq ft house costs 1.2m, you aren't going to be buying or renting it for 2500/month.JoeJohnson wrote: ↑Wed May 10, 2023 3:56 pmThose figures aren't necessarily single family homes....
Plenty of people rent nice things. If you are only going to be some where for 2 years, buying doesn't make sense. Neither does slumming it. Renting versus buying is more of a life style choice than a can you afford it one.
Re: Lifestyle inflation
1-bedroom apartments here (SoCal) are renting for $3K+ a month.JoeJohnson wrote: ↑Wed May 10, 2023 3:56 pmThose figures aren't necessarily single family homes....
Re: Lifestyle inflation
How stable is the income?
My brother in law was making $200k in sales in 1986 (>$500k inflation adjusted to 2023). Life was good! Then desktop publishing made his job obsolete and he never found another job that paid a fraction of that.
Point is, some $300k salaries are more dependable than others.
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Re: Lifestyle inflation
I've rented 5 different houses in 4 different states and all were more than 2500/mo, and while they were nice-ish in nice areas, they were absolutely not luxurious. There are many reasons people rent. Even if you can easily afford it, do you really want to spend the time to buy a house that you'll have to sell in 3 years?JoeJohnson wrote: ↑Wed May 10, 2023 3:56 pmThose figures aren't necessarily single family homes....
I bet if someone posted on here asking whether they should rent or buy a house that they plan to be in for 3 years, almost all of the responses would be to rent.
Last edited by hachiko on Wed May 10, 2023 8:40 pm, edited 1 time in total.
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Re: Lifestyle inflation
Re: Lifestyle inflation
He and his family make over $400k a year while still under 30. They are big boys now. If the income is reliable, big boys should live like big boys. There are too many on this board frozen in fear of personal economic disaster.
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Re: Lifestyle inflation
I could rent out my 1500sq. ft townhome in suburban Utah for ~$2500/month right now.safari wrote: ↑Wed May 10, 2023 4:22 pm1-bedroom apartments here (SoCal) are renting for $3K+ a month.JoeJohnson wrote: ↑Wed May 10, 2023 3:56 pmThose figures aren't necessarily single family homes....