Spoilt brats need advice
March 22, 2010 6:08 AM   Subscribe

No job, loads of "savings" being burnt in rent, financially illiterate

I kind of feel like a bit of a spoilt brat whinging about our situation as many people are in much tougher circumstances, but anyway...my wife and I have a frustrating but not overly bad financial dilemma. We have just returned home from overseas and are jobless. However, we have about $130,000 in the bank from a recent inheritance. I will soon be in full-time study for the next 3-4 years and will have minimal income (max $250 a week) and my wife will be in and out of work because of babies - she has a bit of work on at the moment but will soon be quitting and probably won't be back to work until late this year. As an alternative to burning our savings away while I'm studying full time, I wondered about getting a loan for (for example) ~$300,000 with an ~$80,000 deposit, buying a $350-380,000 home, then using the remaining savings of $50,000 (i.e. 130,000 in bank - 80,000 deposit = 50,000) to pay it off while I'm studying full time (i.e. before I'm back to full time work in 3-4 years) but none of the banks are interested in lending to people that don't have secure jobs. So here we are burning $400+ a week in rent which will be over $80,000 (!!) for the next 4 years while I'm studying, with our $130,000 inheritance in a term deposit. Surely there are better options out there for us? FWIW, our credit ratings are probably ok, my wife's might be a bit sketchy from credit card debt she had a few years back. We don't really have any other debts and my studies will be funded by an interest free government loan. Only other major asset is a $16,000 car. Any ideas on what we should do?
posted by anonymous to Work & Money (15 answers total)
 
Could you use your savings as a down payment on a house?
posted by chesty_a_arthur at 6:10 AM on March 22, 2010


Assuming there'd be a balance, someone would probably have to get a job, though. Or use only some piece of savings as a down payment, depending on what kind of loan you can get, and use the rest for living expenses, which would include housing.

Frankly without fully understanding why your wife can't work, where you are, or what you would do if you didn't have six figure savings, it's hard to understand what your question is.
posted by chesty_a_arthur at 6:15 AM on March 22, 2010


You and your wife are out of work and you want to take on a mortgage merely because you are tired of paying rent and you've inherited a lump sum?

Um, no.

Take a step back and consider: you want to take on the biggest purchase of your lives with no cash flow (income) to finance the debt. This is sheer, absolute, utter, madness.

If you're really at a loss as to what to do with this inheritance, hire a competent financial adviser. But real estate is the last thing you want to own if neither of you is working at a job that generates a sufficiently high after-tax income with which to finance the debt and fund all of life's ancillary costs.
posted by dfriedman at 6:19 AM on March 22, 2010 [4 favorites]


Hm. I jumped the gun here regarding the mortgage.

But the rest of the response applies.

You don't want to take out a loan that you can't finance with your income. Get out of school and get a job if finances are that tight.

Seriously. Don't spend savings to fund your life. That's what income is for.
posted by dfriedman at 6:20 AM on March 22, 2010 [1 favorite]


I will soon be in full-time study for the next 3-4 years and will have minimal income (max $250 a week) and my wife will be in and out of work because of babies - she has a bit of work on at the moment but will soon be quitting and probably won't be back to work until late this year.

It seems to me that if this isn't already a foregone conclusion that your best financial move is to put off the babies until your financial situation is more secure. That and:

So here we are burning $400+ a week in rent which will be over $80,000 (!!) for the next 4 years while I'm studying, with our $130,000 inheritance in a term deposit.

Is there any way you can downgrade from a $1600/month rental to a smaller place? If you've got no room to move income-wise, you're going to have to cut back.
posted by Hiker at 6:25 AM on March 22, 2010


Is there any way you can downgrade from a $1600/month rental to a smaller place? If you've got no room to move income-wise, you're going to have to cut back.

Yeah... I don't know where you live, but in most markets, you can get a 2 or 3 bedroom apartment for significantly less than $1600. You've decided to go to school full-time, so you need to make the attendant decisions that come with going to school, like moving into a place that you can afford. Go smaller, move to a cheaper part of town, and downsize on the luxuries. Or, get a job.
posted by The Michael The at 6:28 AM on March 22, 2010


Seriously. Don't spend savings to fund your life. That's what income is for.

If that were the case, no one would ever go to school, take a big-ass vacation, or just about anything else.

Honestly, I think that (assuming that you are cutting your costs to the bone, living like broke-ass students, etc) using the inheritance to pay for school is a fine way to use it. You'll end up with less cash, but no debt, which is better than a lot of your peers. If you are returning to grad school, and they will be paying you a stipend, remember that the majority of grad students at that school are managing to live within that stipend, and even support dependents on it, so you may want to adjust your standard of living for the moment.

And even if a bank was willing to loan you the cash for a house -- don't forget that houses aren't free to own. Do you have the savings or cash flow for a new roof or furnace, or for $40,000 in foundation work? In your situation, I'd think renting, or buying something really, really cheap, would be a much smarter alternative, especially for the flexibility since you are going to be there such a short time.
posted by Forktine at 6:33 AM on March 22, 2010 [2 favorites]


I don't think you are spoiled brats, but here is the way I see it. People need money to live, so you have two options:

(i) One of both of you could get jobs while raising children and being a student. Many people, myself included, worked full-time while obtaining a higher-education degree (in my case, a law degree). Many other people, myself included, worked fill time while pregnant and after the birth of children. Before the brigade pounces on me, I'm not suggesting that either you or your darling wife are obligated to work, but that is one of the two ways to fund the next few years of your life. If neither of you are inclined to do it, then...

(ii) Option 2 is to spend your savings. I think the house purchase idea sounds insane, because my sense it that you are reacting to a high rent number but have no other reasoning for why buying a house is appropriate. You don't sound stable, like you intend to live in it awhile. You don't sound like you desperately want the security. You just sound like you've internalized the canard that paying rent is dumb when you could be paying yourself by getting a mortgage. It's not always true. It's more often not true, especially for the first something-like-20 years of home ownership. There are a lot of ways to economize what you are spending from your savings in the next couple of years. Look at books and websites on frugality, etc. I don't have any idea where you live or what kind of amenities you deem 'necessary' (pool? 2 car garage? or just 4 walls in a safe neighborhood?), but it is possible that your rent is very high. It's certainly more than you are earning each week, which makes it a bit ridiculous. If you want to live off savings without blowing it all, you'll have to learn to economize.

With respect to a house, remember it's not just the mortgage payment and done. Taxes, homeowner's insurance, increased utilities (which in some places come free with your rent), furnishing the house, etc. And then there are emergencies - new roof, new furnace, etc. as mentioned above.

Personally, I am a believer that adults should have jobs. But I realize many people legitimately feel that they can't have children and work at the same time, or work and go to school at the same time. I know that they can, but I try not to say "I did it therefore everyone should." But, unless you want to get jobs, I think you're going to have to live frugally off that savings. Of course there are other options - move in with family while a student, allow a family member to watch children so wife can go back to work, etc. Only you know whether they are possible.
posted by bunnycup at 6:42 AM on March 22, 2010 [5 favorites]


Word choice and the fact that their rent is weekly rather than monthly lead me to believe the OP might be British or Australian, so maybe we shouldn't assume that they're in the USA.

I would agree with the proposed idea of either putting off babies until you're done with school (3-4 years isn't really that long to wait) and having your wife work, or working while you're in school, if you're set on buying a house. Otherwise, minimize expenses (and probably still put off babies) if you're set on not having steady income while you're going to school if you don't want to fritter that inheritance away.
posted by scarykarrey at 6:52 AM on March 22, 2010


As an alternative to burning our savings away while I'm studying full time, I wondered about getting a loan for (for example) ~$300,000 with an ~$80,000 deposit, buying a $350-380,000 home, then using the remaining savings of $50,000 (i.e. 130,000 in bank - 80,000 deposit = 50,000) to pay it off while I'm studying full time (i.e. before I'm back to full time work in 3-4 years) but none of the banks are interested in lending to people that don't have secure jobs. So here we are burning $400+ a week in rent which will be over $80,000 (!!) for the next 4 years

Since you stated that you're financially illiterate, I'll risk stating the very obvious in somewhat oversimplified terms: buying a house will not necessarily save you any money over rent in terms of spending down your savings.

Right now you are spending ~$1600/month in rent. Checking this online mortgage calculator, if you do get a mortgage for $300K (assuming a 5% interest rate), your expected monthly payment will probably be around $1600. So in terms of monthly expenses, you won't save a dime.

Now, it is true that by owning some of that $1600 will go toward equity. But the thing to remember is that only a portion of it does, and depending on the amortization schedule, that portion might be smaller than you think. If you look at the amortization table in the link above, you'll see that after 4 years, you will have paid $20,000 in principal and about $60,000 in interest. So in other words, during those 4 years you will have "burned" $60,000 of your savings and "saved" $20,000 over those four years. Not a gigantic improvement on burning the full $80,000. Also notice that your $50,000 leftover savings won't cover your living expenses for that period.

One final thought: all these figures include two very big assumptions: first, that the value of the house will not go down. If it does - and as recent history has shown us, that is entirely possible - then your equity can evaporate and you will still be saddled with debt. Second, it doesn't take into account all of the other expenses associated with home ownership, primarily taxes, insurance, and upkeep. Taxes, etc. will probably eat a few thousand dollars a year, and maintainence can present unexpected major expense. A new roof could wipe out that $20,000 in one fell swoop.

Owning means that you can build up some equity rather than seeing all your money go out the window in rent, and that you could see a return on that equity if you sell at a profit. Renting means that you know exactly how much your living expenses are on a weekly basis, you are not in debt, and you are not responsible for unexpected housing-related expenses. In your situation, I'd rent.
posted by googly at 7:51 AM on March 22, 2010 [3 favorites]


I wondered about getting a loan for (for example) ~$300,000 with an ~$80,000 deposit, buying a $350-380,000 home, then using the remaining savings of $50,000 (i.e. 130,000 in bank - 80,000 deposit = 50,000) to pay it off while I'm studying full time (i.e. before I'm back to full time work in 3-4 years) but none of the banks are interested in lending to people that don't have secure jobs.

This is only a good idea if rent is much more expensive than the interest on that size of a loan along with maintenance and all of the other costs that come along with home ownership. Also, you should be worried about your ability to pay that mortgage in the future for the same reason that banks are, once your savings run out, how do you know you'll have enough monthly income to pay it?

Seriously. Don't spend savings to fund your life. That's what income is for.

If that were the case, no one would ever go to school, take a big-ass vacation, or just about anything else.


The #1 rule in personal finance is to spend less than your income. If you ignore every other rule about credit, investing, and everything else finance related but still spend less than you take in, you'll end up okay. Paying for student loans is somewhat of an exception because a degree does generally lead to higher wages over the course of a career, and there isn't much chance before that to save up enough to pay for it, but even then it makes sense to be careful about signing up for a huge debt load.

This tends to be a common problem with windfalls. Especially if you've been living paycheck to paycheck or otherwise didn't have much in the way of savings before, there is a major tendency to splurge and make financial decisions that aren't sustainable in the long run. If you continue to have little or no income for a significant amount of time and don't make drastic reductions in spending, you're going to go through your savings quickly, and you'll have lost what could have been a significant amount of long term savings. The only way to prevent that is to increase your income (get a higher paying job, work more hours) or reduce your costs (move to a cheaper area, buy less stuff) until you stop hemorrhaging money.
posted by burnmp3s at 8:04 AM on March 22, 2010


I wondered about getting a loan for (for example) ~$300,000 with an ~$80,000 deposit, buying a $350-380,000 home, then using the remaining savings of $50,000 (i.e. 130,000 in bank - 80,000 deposit = 50,000) to pay it off while I'm studying full time

It sounds like you've forgotten the fact that loans cost interest, which means you end up paying more than the amount you're borrowing.

A 30 year, $380,000 loan at 5% interest would cost you a total of $734,371.98, not counting property tax. That leftover $50,000 would cover about two years worth of payments, that's all.

There's some tax advantage to taking out a mortgage instead of paying for a house outright, but only if you have income that's being taxed in the first place.

Suddenly that $80,000 in rent doesn't sound so (!!), does it?
posted by ook at 9:02 AM on March 22, 2010


Home maintenance can cost a fortune. Without a steady income, one big unexpected repair (the discovery of foundation problems, asbestos, black mold) could blow your plans to kingdom come.
posted by bonobothegreat at 10:04 AM on March 22, 2010


Reading your description, I am really struck by how far beyond your means you're living. You're living like your income is $130K per year, which is a significantly different matter. Your actual "income" if you completely blow your nest egg over the next four years is around $32,500, which is not all that large for a family with a kiddo. Not only that, you're really going to want to have some savings. Having a kid is one long Surprise Expense! after another. I would recommend that you take half your windfall and put it in an account that you term your "Long-term Savings" and that you not touch it unless you're going to go into debt from an emergency situation. That means major illness or something of the sort, not vacation or "needing" a new car or computer. The other half should be split into two different accounts. One is your savings and the other is your checking. Each month, a set amount gets transferred from savings to checking. That's all you have for the month. If you want to make a big purchase, you need to use the money from the checking account strategically. Under this plan, you get about $1,400 a month. You can supplement that with your take home pay, bringing you up to about $2,400 a month. In the long run, you have $65,000 to either start a college fund for your kiddo or a retirement fund for yourselves.

I suggest this because if every time you go to the bank you see that huge balance, it starts to feel like a burden to be living so frugally. Out of sight, out of mind.

Unless you are living in one of the three most expensive cities in the world, there's no reason on earth you should be spending that much on rent! Seriously, that's insane. Downgrade. (Ignore this if you are living in New York, London or Hong Kong, where you're actually doing decently.) Talking about buying a house that expensive without a job to secure it? Yeah, there's a reason the bank won't lend you the money. There's no reason to think that you're going to be able to pay back the majority of the loan. You should be grateful that the bank isn't letting you get yourself in that deep.

You should be living somewhere that is at least $600 cheaper per month than you are. Even if you have to pay a lease break fee, that will be worth it. Think about it - you're bringing in $250 a week. Even living somewhere that's $1,000 you're using your entire income on housing and you're going to be hemorrhaging money. That's OK if your plan is to use this money to get you through your studies. But if you're starting a family, consider that it's probably not the best long term plan.

There are plenty of part time jobs that would make a big difference in your financial situation. You and your wife should both be considering having some sort of additional income from work. Whether it's tutoring once or twice a week or doing some light house cleaning services, it will pay for your food and utilities and make a big difference in your long term financial health. If you need help making a budget, I've seen lots of good break downs for people's specific situations. Consider a follow up through one of the mods.
posted by stoneweaver at 11:08 AM on March 22, 2010 [6 favorites]


Renting isn't always 'burning'. You could easily lose much, much more money buying a place than renting, especially after you factor in real estate agent fees (when you sell), taxes, maintenance, mortgage interest, and the amount of equity you do (or do not) build in the home you purchase. This goes triple in our current economy.
posted by yellowcandy at 11:47 AM on March 22, 2010


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