Don’t spend your house money on coffee

Wouldn’t it be great if your bank had an “auto sort” to earmarked categories?

There are a million articles around the web on what the future is going to look like, but every time we get TO the future, it looks a whole lot more like the past than it should.

Picture this…you go to Starbucks and try to buy coffee with your debit card. You order your daily Frappuccino and your debit card is declined.  You quickly grab five bucks out of your wallet and pay for your order with cash.

You call up your bank account on your iPhone and it says you have $853 in your account…BUT, you have NO money for coffee.

People are so much happier when they know they are spending their money on the “right” things. They are happier when they KNOW they are not overextended on certain expenses. I spent last week in Redondo Beach CA with my eldest daughter. She has only been in her “new” apartment for about two months. She asked “do you use gross or net income when determining…” I quickly gave her the formula for determining housing expense based on gross income. I showed her how to strip out overtime and bonus monies to calculate “dependable” gross income.  Miraculously (or not) her rent equalled 23% of her gross income. I said that’s perfect…just right. That should leave you at least 5% of gross toward saving for a house.

I was amazed at how happy she was to know that her rent payment was exactly would it “should” be…in fact, a tad under what it “should” be. You could say I “made her day”. That’s when I got the idea that your bank statement could “make your day” every single month, if it was broken down to earmarked categories.  Imagine a day when you can’t wait to rip open that bank statement, for concrete evidence that you were on target as to your personal financial goals.

One of the “old” lender guidelines for approving a mortgage was seeing that the would be borrower had deposited “the difference” between their current housing payment, and the soon to be approved new housing payment, into their savings account on a regular basis. Rent is $1,300 a month.  Mortgage payment will be $2,200 a month. $2,200 minus $1,300 ($900) was deposited into their savings acount every month for 15 months prior to purchase.  Downpayment of 3.5% of sale price (FHA) = 15 months of housing payment difference.

Let’s break that down.

1) $2,200 a month equals a loan amount of roughly $400,000

2) $2,200 a month equals 28% of $94,000 gross income

3) $3.5% downpayment on a $400,000 house is $14,000

4) Factor in another $8,500 for Closing Costs

Let’s say your bank let you plug in 28% of your gross income to be earmarked for “housing expense”.  Every time you got a raise, you changed your gross income so that the bank statement continued to calculate 28% of your gross income for housing expense, even if your rent didn’t increase.

You make $65,000 a year (2 incomes) when you rent your first apartment for $1,300. 28% of gross is $65,000 divided by 12 times 28% = $1,516.67 a month. You find an apartment for $1,300 a month. The bank STILL allows $1,516.67 a month for ONLY housing payment, and automatically transfers the difference of $216.67 every month to an earmarked housing expense account.

While visiting my daughter we drove through a neighborhood and she said, “I love these little houses with yards”. Contrary to news media reports on housing, there were none, nada, NO houses for sale for blocks and blocks in that neighborhood, so I couldn’t quickly give her an accurate read on price. But given I have worked that area before, I estimated price at $350,000 in today’s market (50% down from peak there), $400,000 tops.

Now she knows exactly what she needs to get the house of her dreams. She knows how much money she has each month to set aside for future housing expense (28% of gross minus rent payment). She knows she can sock away the bonus and overtime money and raise money into an earmarked housing account, because we didn’t use that money to calculate the future housing payment, we only used “dependable” salary income sources.

How great would it be if the ATM card said NO, you can’t buy this coffee with your house money!? 

 Of course for one expense you can do it yourself, but if you could plug in all of your expenses so it said

 “no, you have no money in your gift account – give that person a card”.

 “Hey, you are using 1/5th of your annual electric bill expense this month – shut off some lights when you leave the house”.

How hard can it be to combine a bank account program with an expense program so they operated as one? Maybe some bank has that feature, if they do let us know.  If not, someone should “invent” it.  The bank that says “We help you keep track of, and achieve, every one of your personal financial goals”, might just have the ticket to the bank account of the future.

In the meantime, don’t spend your house money on coffee.

This entry was posted in Industry Talk and tagged by ARDELL. Bookmark the permalink.


ARDELL is a Managing Broker with Better Properties METRO King County. ARDELL was named one of the Most Influential Real Estate Bloggers in the U.S. by Inman News and has 33+ years experience in Real Estate up and down both Coasts, representing both buyers and sellers of homes in Seattle and on The Eastside. email: cell: 206-910-1000

72 thoughts on “Don’t spend your house money on coffee

  1. I did this using direct deposit from my employer. I direct deposit a specified amount of money into savings so it never hits the checking account. The rest goes into checking. It’s not automatic but it’s simple enough to calculate that difference. This strategy relies on your employer offering direct deposit to multiple accounts and the discipline not to withdraw money from savings.

  2. Good idea, Jeremy. Back in the old days, banks used to have “vacation clubs” as an example of “earmarked” accounts. But having a bunch of separate earmarked accounts can be cumbersome, and I think in this day and age, unnecessary. If the bank simply had a statement that looked more like your everyday, run of the mill expense program, and broke one account into 15 or so categories, it would make most people’s lives a lot easier.

    As to the discipline not to use house money for coffee, at least one would KNOW that they are dipping into the house money for coffee, instead of wondering where it all went at the end of each month. Perhaps it taking that little bit of effort to go into the house money category to get that coffee, might cause them to think twice about it, and maybe bring their coffee from home in a travel cup tomorrow.

  3. I think there are lots of ways to accomplish this. For instance using Quicken or Quickbooks for your personal accounting and really sticking to a budget. You can set up the software to pull automatically from your checking account and then you can know exactly what you are spending your money on and make better decisions based on that. But in order to really make it work you have to have both the discipline, and the desire. Ultimately it comes down to wanting the house more than the Frappucino and accepting that you probably can’t have both. Without discipline and desire I am not sure it matters what sort of technology you use to structure your finances. The truly undisciplined will find a way to get around it!

    This is partly a maturity/judgement thing and it sounds like your girl is getting to the point in her life where she is ready financially and emotionally to make those sorts of trade-offs. (And since some people never get to that point I am sure her mom gets to take some credit!)

  4. Sandy,

    My sister (who is a budgeting expert) always used that 20 envelopes in her purse thing. No money left in the coffee enevlope 🙂 I think having Quicken or Quickbooks on your cell phone might be the answer.

    Is there an iPhone app for Quicken?

  5. I think that QB has a web application that is accessible via iPhone but I am not sure how useful it is for personal use. I think it is more geared towards business owners.

    That said I really think for most people the best thing they can do is to use an app like QB or Quicken to track spending for a month, and then use that to create a realistic budget. You can pretty easily see where most of your “inappropriate” spending is happening if you do that, and just having spent the time to know what you spend money on is really useful. What gets most people, as you alluded to in the article, is eating outside the home, entertainment, etc. The smaller expenses that add up when you indulge too often.

  6. P.S. Just got back from getting my hair cut and bought a new comb to empty out my heavy change purse…the cashier said “is that your house money you are spending?” She must read Rain City Guide 🙂

  7. yeah, I use it has pretty graphs. it automatically categorizes your credit and debit card purchases. it is also nice for consolidating and viewing the complete state of your finances. plus it’s free!

  8. Hi Tech Teacher,

    I was out of town last week, so skipped the stats post last night. A quick check looks like a trailing bottom…pretty flat. We’ll need to see a boost before end of June, or 4th quarter 2009 is not going to be pretty.

  9. If you need some forced savings program to prevent you from throwing away $4 on a latte each morning, you have no business buying a house!

    You should only buy a house when you (and the bank) know very obviously that you have so much money saved up (and being saved) that you don’t need to do all the fancy calculations to see if you can “afford” the house.

  10. That’s just not “The American Way”, sampai.

    We have zero down VA and 3.5% FHA and get $10,000 down payment monies from the House Key program, and, and…

    Only the rich can buy, and the poor can rent from the rich, is simply not The American Way. Never will be.

    It’s great that you had hundreds of thousands of dollars to put down. But many someones are buying a house today in this Country with only $10,000, or less. That is why people move here for the opportunity this Country affords people.

  11. FHA is the new subprime. You and I will be stuck paying those bills with our tax dollars.

    I didn’t move to the US so I could be up to my eyeballs in debt. I became an American citizen to enjoy the freedoms that Americans have. The American Dream is freedom, not indebtedness.

    Not everyone should “own” a home. Eventually, America will understand that. How long and painful that lesson will be is TBD.

  12. Too true. I have been trying to reduce my bills and save more money. The credit crunch makes me worry that I wont be able to borrow money if something unexpected came up, so I have been saving a hundred dollars a month in my fire safe in cash just in case. Rainy day funds.

  13. sampai,

    The American Dream is home ownership and FHA and VA have been around for a very, very long time.

    It is NOT the new subprime…not even close.

  14. PRE whomever you may be (please use your first name somewhere),

    Yes, I find myself hoarding cash as well. It gives a sense of security. We give ourselves whatever we need to move forward with confidence.

  15. Interesting….I wasn’t selling RE but I remember the old days and how banks calculated whether you could “afford” a loan. It always amazed me that if you didn’t need a loan, you qualified, and if you did need it……well that was a different story 🙂 We saved then, maybe that’s the lesson our children will finally learn.

  16. Ardell, I will bet you a dollar to a nickel that a very large percentage of these FHA mortgages will go belly up . FHA has now become the predatory lender of choice for those who can’t find anyone else to make a loan.

    If I had any understanding of how to do those fancy “derivative” trades, I’d be shorting FHA mortgage tranches right now.

  17. Ardell –

    If you really believed that everyone should be able to buy and own a home then you should be cheering price declines instead of searching for any sign of a bottom and hoping for them to skyrocket back up. Homes are unaffordable right now, even after our huge declines from peak, by any affordability metric you wish to choose. Hopefully someday people will learn we are much better off as a society if people are spending a very low amount of their cash on their home, instead of 30-50% of their income. Its a total misallocation of resources which could go to actually productive investments in businesses and technology.

  18. b,

    28% of income on housing expense has been a mainstay for a very, very long time. You really think that’s too much? If people would stay in their homes longer, that % would reduce as their incomes rise. That’s the general plan, but many people borrowed against their homes even when they did stay.

    I don’t understand this statement:

    “Its a total misallocation of resources which could go to actually productive investments in businesses and technology.”

    How is that more important than your home and family?

  19. Ardell – I spent years as an educator with Consumer Credit Counseling Service and presented money management concepts to thousands of adults and high school students………..A lot of good it did (ha!). I think there are several things people can do to ensure that they have control over their financial lives:

    1) Buy (or borrow a copy) of Your Money or Your Life by Vicki Robin. Read it, absorb it, live it. It’s personal financial discipline on steriods.

    2) Go to your dictionary and look up the definition of the world ENOUGH. Unfortunately, American culture doesn’t know the meaning of this word. Decide what’s enough for you and work toward that goal.

    3) As for the critics of owning a home based on some notion of “best use of resources:” Please be careful about what other people want. Just because you would rather spend your resources on travel or boring economics texts, there are tens of millions of families who have chosen to own homes and are content financially. Believe it or not, there are a lot of rational adults who see a deeper meaning in owning a home.

    4) “productive investments in businesses and technology” What a bunch of baloney. Businesses and technology would have no reason for existence if people didn’t live somewhere. I suppose businesses should be surrounded by shanty town slums so that businesses can be profitable. What a strange world-view…………

  20. James,

    I agree that teaching people how, is not a good enough answer. That is why I call on the banks to implement programs in their technology that assist people on a daily basis. I have never been an educator, but I was a banker for 20 years. The advancements are negligible in this regard.

    A young person came to me several months back and said “the bank is taking all of my money”. Of course I thought the poor girl was confused because banks don’t just “take” your money. Turned out the bank DID take $2,000 in $35 fees. Every cup of coffee, and it was literally coffee, cost her $3 plus $35 or $38 in a very short period of time. They had implemented a $35 for moving money from her savings to her checking.

    She had plenty of money in the bank, thousands even, just not in the “coffee account”. Instead of rejecting the charge, they moved $3 and charged her $35 to do so. By the time she received and read her statement from the month, they had charged her $2,000 in “coffee transfer fees”.

    She felt betrayed by the bank. She said, “When my Mom died I brought the money here so they would help me…but it looks like they helped themselves instead.”

    Another example, of course, is the 30% interest charges on credit cards. I remember someone coming to me saying the bank increased the interest rate to 30%. No they hadn’t been late on any payments. Even if they had been late on a payment, is 30% intererst an appropriate remedy?

    Banks can help people with their financial well-being, and should be the place you go for assistance with your financial well-being, but they have chosen not to “be” that for the public at large.

    So I guess we need BIG government. We need usury laws that prohibit exessive interest charges. We need oversight into the everyday practices of banks that help the rich get richer and the poor get poorer.

    We need some innovation on the part of the banks, and I say checking accounts with built in budget accounting is needed, and not too difficult to implement.

  21. Ardell – If I could venture to guess, I’d guess that the person you are speaking of in the post above had her accounts at WAMU? I would not be surprised in the slightest.

    I think the main problem with the idea that banks should help consumers manage their money is that there is no financial incentive for them to do so. Not when they can charge people $35 to move money between accounts and benefit from charging higher interest to those whose skills are not so great in this direction.

    And I know it sounds terrible for a real estate agent to say so, but I sort of halfway agree with Sampai that people who can’t manage their money on their own aren’t ready to buy a house. Fortunately there are tools already in existence that can help a potential buyer learn those skills, as can we as professionals who should have some experience in this area.

    Anyway, I think if buyers are waiting for banks to make it easier for them they will probably be waiting for a very long time. If a bank did make this kind of tool available you can bet they would charge an arm and a leg for it. So you’d still be better off doing it on your own.

  22. James / Ardell –

    Where does your housing money go each month? What is its productive use? If you had the same house you have today for 50% less price, what uses could that money be put to instead?

    The problem is that easy credit and other market distortions, such as MI deductions, have ballooned the price of property far beyond what it should be. This means that EVERYONE, renters and owners, are shoveling money into a non-productive asset. In aggregate, most of your house payment goes into banks who, in turn, use it in depressingly poor ways. Your inflated mortgage payment or rent turns into thousands of homes built in Stockton, CA which will end up being demolished. It goes into buying someone a HELOC Hummer that is then taken away and sold at auction for a quarter the price. It goes into a thousand VP’s pockets, who use it in a hedge fund to drive the price of oil up to $150, so you can afford to spend even less. It is vaporized, in other words.

    If people were instead spending 15% of their income, on average, for the same housing (which is the case for the middle class in many other countries) then it is rational to think that other 15% would be funneled into the economy for more productive investment use. Who do you think would make more robust and diverse investments in the economy, WaMu with a billion dollars sloshing around, or a million people with an extra $1000? Funneling so much of our capital into a non-productive enterprise like buying homes is a waste.

    As for 28% being a mainstay, for most of the time that was the maximum you should spend on housing. These days it is the minimum. Even you told your daughter that she should be spending that amount on housing, but why? Percentage of income for both renters and owners going into just housing has increased steadily for many years (go look at HUD/census stats if you don’t believe me). This is even more disturbing when you consider how many more families are dual income now and still spending an increasing percentage of income on their housing.

    Housing is picked on this regard because it absorbs so much of the average persons income. Student loan debt and healthcare are other great examples of balance sheet waste for the average person. I think the country would be much better off overall, and have a more robust economy with better investment spread, if people were not harnessed to having to spend so much of their income on housing. I think technology has shown pretty conclusively that distributed systems are, in general, far more robust than their counterparts. So its odd we have collectively decided that an increasing portion of our income must go into lining banks balance sheets with mortgage debt, who will then turn around and, as they have done repeatedly, waste much of it.

  23. “As for 28% being a mainstay, for most of the time that was the maximum you should spend on housing.”

    Somewhat agree. It was the “auto-approve” %, meaning the conservative position, IF debt payments plus 28% didn’t exceed 36%. It’s the back end that went “out” first and foremost.

    Reducing the 28% so people can have more debt for less important things, is not the answer. Fancy car vs. decent housing? If you reduce the front end to 15% (which is clearly not practical for most people and never was), where would you move the back end?

    Seems you would be OK with putting a family of 5 in a 2 bedroom apartment, so they can invest their earnings in “business and technology”? I don’t get that. Can you explain that to me?

    28% in housing leaves 72% for other things. Isn’t the roof over your family’s head, and their enjoyment of their home numero uno for most people?

  24. b,

    Seems to me moving too much (and borrowing against your equity) is the culprit. Anyone I know who has no or a very comfortable mortgage payment, has owned their current home for a very long time.

  25. “Ardell – If I could venture to guess, I’d guess that the person you are speaking of in the post above had her accounts at WAMU? I would not be surprised in the slightest.”

    The person in my “post” is my daughter.

    The first person in comment #23 is yes…about WAMU.

    The second person in my comment #23 is about B of A.

    Used to be smarmy finance companies charged exhorbitant rates…now it’s your friendly neighborhood, heretofore highly respected, bank.

    When I was in banking there were usury laws that capped the rate a bank could charge. I believe they differ state to state as I remember card processing moving from PA do DE so they could charge higher rates.

  26. You are missing the point Ardell. We are collectively spending too much of our incomes on non-productive uses, the biggest being housing. That amount is increasing steadily each year. I am not saying people should be forced to live in squalor to only spend 15% of their income, I am saying that due to various market distortions people must spend 30% of their income on something that should not cost 30% of their income. If they had that extra money, it would go into better and more diverse uses. What is the replacement cost of that $700k Kirkland rambler? It sure isn’t $700k. We have created far too many incentives to overspend on housing, and that money is not being as productive in the economy as it could be.

    Please do not think about this as “people should be forced to put their family of five in a shitty apartment”. Its, “people should be able to put their family of five in a normal house for only 15% of their income”. This is very similar to both healthcare and student loans. The US far overspends other countries on healthcare and it comes out of your pocket. Where does it go? Into insurance companies and other middlemen, who in my opinion use it less wisely and productively than it could be if freed up for the consumer. Or student loan debt, young people are now basically forced into a $300-1000/month obligation for 10 years in order to get a decent job. The country would be much better off if that money was going broadly out into the economy, rather than funneled into a select few megabanks who use it build stupid islands in Dubai or to leverage short the stocks in your 401k.

    Basically we are funneling an ever increasing amount of our income into the financial sector, the largest method being mortgage payments for both owners of homes and owners of rentals. Our economy would be better served if that same money was instead being spread around to many other sectors. Of course some of it would still end up in finance, via you sticking it in a savings account, etc, but much more of it would go around the rest of the economy. The financial sector as a percentage of GDP has blown up since the 1980’s to something like 30% now.

  27. b,

    You (and others) lose me when you point to other countries vs. our own historical data. Right or wrong, we don’t want to be like other countries.

    What other country are we supposed to be emulating in your example?

    I don’t recall any U.S. data showing 15% of income being relevant…unless it is 10 years later or more, and they are still living in the same house.

    When people who comment pull too far outside of any known historical reality…frankly, it causes me to “tune out”. If the discussion has no basis in reality, it ceases to be a discussion.

  28. b,

    I’m with you on the student loan debt. Still, the people in this country discount one’s abilities if they don’t have that piece of paper. Why is that? Who is perpetuating that myth? One would think the Bill Gates story would have had some impact…but no.

  29. Yes, I meant comment #23 not the “post.” I would not be surprised to find that WAMU charged someone $2000 in fees to move money between accounts because I’ve heard of it happening to other people.

  30. I also balk a bit at comparisons to other countries or history going back more than 30 or 50 years. I think most Americans would be unwilling to accept either the standard of living that is “enjoyed” in many “other countries” nor would most Americans be willing to accept the standard of living that was enjoyed in our own country prior to the middle of the 20th century. What standard of living was enjoyed, was mostly enjoyed by men, as in the days before “modern conveniences” it was us women who did most of the drudge work that made life tolerable.

    We have a lot of bells and whistles that cause us to have a much more comfortable life than our predecessors or those living in most of the rest of the world. We have more time now for such enjoyable pursuits as updating our Facebook, or responding to comments on blogs.

  31. ARDELL – this is brilliant:) I woudl just love it. When I was a kid it was a shoebox budgeting system – so much for each of what I wantes from my various allowances and babysitting jobs – so nice to be electronic of course. I mainly rely on Microsoft Excel for just about everything, but I would love some guidance form my bank statement!

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