August 27, 2013

DINKs vs SITKOMs and Other Family Finance Disasters

When it comes to socking away money for retirement, practically nothing beats being a DINK. A married couple without any children, and both parents working, is often referred to by this acronym, representing the Double Income, No Kids. Sometimes the DINK acronym is followed with a lower case "y", as in "yet". No kids, yet, so now's the time to take that extra vacation or save money, because trust me, you'll need it.

Some couples blissfully stay in this stage for their duration - happy for both partners to be significant wage earners, and not adding on any expenses disguised as smiling children. But others don't, which often leads to the inevitable decision of how quickly either parent returns to the workforce, if at all. Some parents, usually the mother, take reduced career roles or part-time jobs, to augment the child raising, and others try to make do with the primary wage earner's income, knowing it will be a little bit tighter around the house, but by gum, generations previous have made it work, so why can't we?

This is the lesser known and obviously much less healthy option of being SICK, "Single Income, Couple Kids". With income decreased, approximately by half, and expenses up, the flexibility in finance is decimated. Junior needs new clothes, or to eat regularly, or to attend classes, or maybe he needs braces. And the second member of the couple still likes shopping.

Living in Silicon Valley as I do, there's plenty of great opportunities for hard working people to find incredible jobs with incomes often the envy of other parts of the country and world. Often, however, the expenses rise to match - especially when it comes to the base living expense of owning a home. Time and again, I've seen happy couples start to fret as they outsize their small apartment, and their family prices themselves out of the Bay Area, as they retreat to cheaper places, be it Texas, Utah, Oregon or Tennessee.

Still others try to ignore the oppressive costs of ownership and enter into the "sounds funny but isn't really funny" reality of what's known as a SITKOM. As it was explained to me by a coworker, that's where you have a Single Income, Two or Three Kids, with an Outrageous Mortgage. That's a sitcom with a laugh track, but it's at you. You can work yourself crazy and never see those kids, you can have an equity event that makes your living comfortable, or you can leave, essentially. Those are your options.

Zillow Prices in Sunnyvale. Lots of M's, Few K's.

Consider, for example, the current bubble that's happening in Bay Area housing. My wife and I bought our home in Sunnyvale, which is pretty mid-level on the Peninsula, priced a tad higher than Santa Clara and the East Bay, for example, but trailing the ritzy Palo Alto, Los Altos and San Carlos for housing prices. In 2010, seeing prices fall from their 2007 highs to about 90% of peak, we bought at what I saw as 90 cents on the dollar, getting ourselves a 4 bedroom home with room for ourselves and our soon to be three kids. In the ensuing three years, with an economic recovery, a nearby Facebook IPO, and continued growth for area jobs, our home is now priced greater than 30% ahead of where I bought it. I certainly couldn't afford to live where I live now if I were looking, if that made any sense.

Editor's Note: Trust me, I'm glad it's gone up. So don't get me wrong.

Taking the abstracts out, the median price for a 3 bedroom home with just over 1,500 square feet in the area is approximately $1 million. With interest rates around 3.75% to 4%, and property tax to match with about $12k a year, you can pretty easily see your expenditures, on the home alone, being upwards of $5,000 or more out of pocket every single month. And that's before you turn the lights on for electricity, get water going, ask for garbage pickup service, add TV or Internet and put a single spoonful of food into your growing kids' mouths. So if you're taking home $60k a year after taxes, you have to be making about $90k just to cover that cost, with no additional headroom. It takes a salary of significantly more, along with perks like stock options that have real value, to be able to keep above water each month.

A Typical Area Home's Meteoric Rise

Exciting math, right? That's part of why you're seeing stories about developers piling into bunkbeds at hacker lofts in  San Francisco, and others are saying it takes an equity event (or two) for an entrepreneur to even afford to stay here.

That hair-thinning worry and the corresponding rise in home value, as well as the knowledge that prices could eventually reverse themselves (as things that go up often come down), has me occasionally putting out ideas. For example, if our home sold for the price Zillow lists it, and most homes do, or even higher, I could pay off our mortgage in full, and with the resulting cash, I could buy a equivalent home elsewhere in the country and fully pay off four years of college for all three of my children without any issue. As a parent who wants to make sure my kids are taken care of, and one who wouldn't mind taking expenses down, it's a fun logic test, if nothing else.

Unfortunately, the buy low and sell high mentality one brings to the stock market, where you can trade a stock you bought earlier in the day or week, doesn't really apply to physical goods and livelihoods like a home. You can't just opt out of the housing bubble for a month, wait for prices to cool as you park in a hotel, and then buy back your home at 20% off. If you could time that, you'd be a magician.

So that drives SICKies like me to think of even more aggressive ways to make change. Can the spouse get a job that more than pays for inevitable daycare and doesn't saddle us both with compounding damage to lost face to face time with the kids? Is playing the lottery or PowerBall when it hits record highs a solid investment? Can I augment my income by playing professional poker if I watch enough Hold 'Em on late night ESPN? Or should I just put everything I have on the next tech IPO and ride their coattails?

Don't get me wrong. I love Silicon Valley and there's really no other environment like it - where so many people obsessed with tech and changing the world through innovation reside in one place, and where so many of them refuse to take no for an answer. But as someone who was working here through the first dotcom boom and crash, and has seen recessions since, I hardly want to see the tide turn the other way and find those of us who have been taking the extra step to expand a family and keep a solid job going are on the wrong side of the ledger.

Prices are going up, and it could come to a point where you need to command two incredibly high paying jobs and an equity event even to survive. It could be an odd phase of the inner city in reverse, with the less privileged fleeing to the outskirts and commuting in to work with those who've already hit it big. That'd be SICK.