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?
Published or updated June 14, 2011.