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Family Earning $225k Annually, No Emergency Fund

This article was written by in Planning, Real Estate and Home. 22 comments.


Money Magazine featured a story about Rick and Amy Mendez, a couple in their early forties with two children, earning an income of $225,000. They have a healthy retirement plan balance, and they needed to borrow from their 401(k) to pay for an emergency. Here is a family of four earning $225,000 a year, with a nanny and two investment properties, that can’t afford to replace the roof in their primary residence.

It’s easy to judge other people’s choices when they are brave enough to feature their expenses in a national magazine. This level of income for a family of four should be enough to cover expenses, save for the future, and handle emergencies, but the Mendezes are running into problems. The writer of the article analyzes the family’s expenses and concludes three changes are necessary in order for the family to put away $25,000 for emergencies: slice the budget, turn off the 401(k) for now, and pay down the credit card bill to the tune of $2,000 per month.

The financial adviser and the article’s author completely overlook that the family owns two investment properties in Florida that are under water. Like many others, the Mendezes succumbed to the perceived easy money available in investing in Florida real estate. When the real estate market crashed, the paper losses have prevented them from acknowledging that they made bad investments and should get out of them.

It’s not clear how much of their $4,450 monthly payment towards mortgages, 401(k) loans, and car loans goes to these two properties, but I estimate they could save at least a thousand dollars per month if they sell. Since the properties are underwater, though, they’d have to come up with the balance of the loan. It’s not clear what the value of the properties are and the remaining loan balances, but this short-term hardship could be worthwhile to prevent long-term problems. With the increased monthly cash flow, they could start building a $25,000 emergency fund.

Do you think they should keep the failing investment properties and wait for the values of the homes to recover?

Money Magazine

Published or updated June 14, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 22 comments… read them below or add one }

avatar bb

If those two investment properties can become rental, they’re worth to keep, maybe…

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avatar 20 and Engaged

I think they should’ve thought about saving up for an emergency before they invested. I think it’d be wise to sell the properties.

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avatar The Saved Quarter

I’m with you! The emergency fund should have been firmly in place before buying not one but two investment properties!

I’m not sure that selling them is the best option if they’re underwater – how will they be able to pay for that? But they could definitely slash their spending to bring their spending and expenses in line with their income so they’re not digging themselves further into the hole.

I also think the advice to stop the 401(k) isn’t smart, especially if they have an employer match. Even after the 401(k) contributions, they’re bringing in just shy of $17,000 a month. They still have $9,000 a month AFTER paying their mortgages, debt, and childcare. Really, they make it on mere $9,000 a month?!

There’s something missing in this story. It just doesn’t add up.

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avatar Big Joe

If the two Florida properties are under water, selling them is unlikely to provide any net proceeds to the seller, and they will remain liable for the amount of the remaining mortgage not covered by the sale. They’ll have less debt, but it’s unlikely that their monthly expenses will improve.

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avatar Luke Landes ♦127,470 (Platinum)

That’s true. The process would probably be difficult, but they could stop payments on those mortgages and work out a short sale deal with the lender to reduce the balance. I see your point that there weren’t be any net proceeds, though.

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avatar Twiggers

Flexo: There is no way a bank will give them a short sale.

We are involuntary landlords (our home wouldn’t sell, but we had to move cross-country). We tried to request modifications, short sale permission, etc. because we are currently losing money every month.

We were told that we can’t modify because we don’t live in the home. We couldn’t short sale because we can afford the monthly payment.

At $225K/yr they can afford the payments as well (I’m guessing, based on the info you provided). So they probably wouldn’t qualify for a short sale.

They need to suck it up, rent the properties, and sell later. They probably can’t afford the losses (we can’t). where would they come up with the money to pay the difference when they couldn’t even afford a roof?

I’m sure they can cut expenses elsewhere to build up and EF.

We currently have an EF set up just for that property and are hoping to sell in about 6 years when we’ll hopefully be at a break even point. We’ll lick our wounds and call it a lesson learned.

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avatar Mike

It really isn’t about how much you make, but how much of it you spend. Like the article says, it’s easy to judge this couple, but there are tons of dual income households out there making way more than $225k with way more than $225k in expenses. The opposite, however, also holds true for the family only making $75k, yet only spending $50k of it. Take the time now (and I mean right now, yes I’m talking to you!!!) to list your income and expenses on a spreadsheet so you know exactly where you stand. Pay down the debts one at a time (smallest balance first) as fast as you can while also putting at least $10/week in an automatic savings plan. You’ll be absolutely stunned at where you are 5 years from now. Best of luck to all!

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avatar Cejay ♦1,521 (Half-Dollar)

I think they should cut their losses now and sell. Why keep pouring money into a bad deal? They should also tighten their belt and save and pay down debt. As you say, it is easy to talk about others but I have been there and done that. Hubby and I were making $60k a year and were so deep in debt, to us, it was not funny so we made steps and started to work. We now have a healthy EF fund, no bills other than utilities. medical, food and gas. We both submit as much as possible to 401k and have our own little set of investments. It was so hard and it even meant forgoing that dream vacation for our 25th wedding anniversary to pay off house mortgage. But now we can afford it for our 26th and feel so much better about the expense. It is possible.

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avatar cashflowmantra

They should definitely try to get out of those properties and stop throwing good money away. It will take years and maybe even a decade for those properties to no longer be under water. Short sale, strategic default, or whatever it takes to be rid of that obligation.

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avatar Money Beagle

Yikes. If I was making that kind of money, you’d best believe that a new roof would be afforded out of what I had leftover from one or two paychecks.

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avatar avonbyc ♦126 (Cent)

It probably depends on how far underwater they are. If they shortsale or default, not only does it hurt their credit but it lowers values of neighboring properties which is not really fair to the other property owners. What I mean is if it become commonplace to shirk you responsibilities financially we will all be in a world of hurt. How about they get rid of the nanny and do what the rest of us do- work things out.

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avatar jim

I don’t think there is really enough information given. Just cause the rentals are underwater doesn’t mean they must sell them. We don’t know the cash flow situation on the rentals. Its unlikely but they could even be making a profit.

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avatar Ceecee ♦53 (Newbie)

Not if they can’t keep a roof over their own heads!

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avatar shellye ♦107 (Cent)

I agree w/Ceecee. If they can’t keep the roof over their own heads from leaking, why are they hanging onto investment properties that will probably take years to recover from the losses in valuation? Every once in a while Money mag. has a doozy of a story about someone with bad money mgmt skills, but this one might top them all.

SELL THE RENTALS!

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avatar Twiggers

I don’t understand any of the advice. How does selling the rentals do anything for this family in the short term? If they can’t afford to pay for a roof on their own house, how do you propose they come up with the money to sell the houses that they are UNDERWATER on? In addition, the article doesn’t mention whether they are in a default judgment state.

I’d love the advice because I’m in the exact same situation. How can I get out from under my rental property without damaging my credit and not having to come up with any out-of-pocket money?

They need to cut the fat from their budget at home. Nanny? See ya. Second or third frivolous car? Buh bye. Big boy toys? Sell ‘em all. Big fat cell phone bill? Cable bill? Eating at Whole Foods? Movies at the theater?

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avatar DonnaFreedman ♦70 (Newbie)

I’m no real-estate shark, but it seems to me that selling the rentals at a loss would be preferable to operating them at a loss. The Florida market probably won’t change any time soon, and those rentals will need upkeep/repair as time goes on (renters leave holes in walls, water heaters need replacing, et al.).
They REALLY need to get a handle on their spending, too. If I were sinking deeper every month I’d drop the preschool — the little boy is nearly at kindergarten age, so a few months of being at home won’t hurt him. That money is more desperately needed elsewhere, e.g., paying down the doggoned credit cards.
What kinds of “emergencies” caused the cards to be used? Real ones or imagined ones? They need to get a handle on their spending immediately. Go to the mattresses for a few months, tracking every penny, and watch those card balances fall. Brainstorm ways to make smarter spending choices in the future. Sell off a few of the frills and throw the proceeds at credit-card balances, too. When the cards are paid off, take the money you would have spent on monthly payments and pay extra on the 401(k) loans, if you’re allowed; if not, then build that EF.
Have they ever thought what would happen if one of them were laid off or had hours cut? They need to stop spending every penny (and then some) that they earn.

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avatar underwater

Without numbers this is really pointless.

Are they 30K+ underwater on the homes? If so, then operating at a loss every month is probably OK. Let’s say they are “losing” $200/month on one of the homes. Even if they hung on to them for 10 years, they would still come out ahead…..not to mention the possibility of default judgments, judgments against their current assets, etc.

In addition, there are some slight tax benefits with that $200/month loss on the property.

Unless the homes are 20+ years old, there are likely very little maintenance fees….and a good property manager will help ensure that they don’t get bad tenants in there.

Holes in the wall, etc. are covered by deposits. Landlord should be collecting a full month’s rent as a deposit to cover that.

Now, if they are more than that underwater (a distinct possibility in FL) then it might make sense to walk away.

I’m currently in FL and the rental market is OK….however, we’re starting to get a little saturated since everyone is coming in and snapping up the cheap condos with the intent to rent them out for 6-8 years and make a profit.

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avatar DonnaFreedman ♦70 (Newbie)

@Underwater: I managed a small apartment building for a few years and I can tell you that deposits may not cover needed repairs. Example: One tenant didn’t notice his toilet had blocked up and was running, running, running…the result was several thousand dollars’ worth of damage both to his apartment and two downstairs ones.
Keep in mind, too, that keeping out “bad ones” can be a crapshoot. You may not know they’re bad until AFTER they develop the meth habit, or decide to get a cat that ruins the rug. (One tenant didn’t think she should have to pay for the spot her cat clawed literally down to the subflooring. She considered that “normal wear.”)
It’s possible that the couple can hang on to the properties if they cut back drastically everywhere else. They might also decide that the stress isn’t worth it.

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avatar skylog ♦368 (Nickel)

this is a classic case of “it isn’t what you have, but what you do with it.” as someone who is not making nearly that much, it is just impossible for me to imagine having this “problem,” but, it just goes to show a lot can be done with a little and sometimes only a little can be done with a lot.

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avatar qixx ♦1,890 (Half-Dollar)

I’m surprised nobody has yet said to sell just one of the properties. They might not be able to come up with the difference on both rental homes, but the difference for one is much more manageable. Selling one should be a priority just as big as the EF.

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avatar Ginger

I would not sell the properties nor stop their 401k investments. They are not even putting away 10% in their 401k. What they need to do, is cut the wants from their budget. Maybe refi their current home, to help cash flow, if the rate do down much more. Just by cutting wants, and nanny costs they will save $1400/month. We do not know if they are doing everything they can to save on taxes. By opening a flex account, they could save another $160/month. It may take longer but cutting retirement and their investments is not the way to go.

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avatar Handy Man, Crafty Woman

oh my, I can’t imagine having this problem, either! goes to show you that people making way more than average can still have money issues due to poor decisions. No, the real estate tanking isn’t their fault; but there MUST be some bad decisions being made there.

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