Am I missing anything from this budget?

Question

Background: My wife and I are thinking of purchasing a new home. The cost of the home (1.8M) maxes out our cash reserves, after taking into account the extra money required for moving and then furnishing the house. Because of this, I decided to prepare a budget to make absolutely sure we could afford it. In particular, I want to make sure that I'm not missing anything or being unreasonable. Part of me wonders whether we should consider something a little cheaper (say 1.3M) to be absolutely sure.

Here are some basic assumptions you should make when considering this budget.

1. Income: After maxing out 10% retirement contributions and health care costs including life insurance, my after-tax (federal, FICA, state) takehome pay is 145K. Retirement saving is on track.

2. You can assume that my job is very secure (tenure). My wife also works, but her job has no guarantees so we don't want to count on her income. In other words, this budget is a bad case scenario. Obviously things could go worse in terms of unexpected significant health care costs, for example. But it is not unreasonable to expect that my wife will continue to have a 1K+ job (before taxes).

3. We have a child who is 1YO and don't plan on another.

4. My job also basically covers college tuition so saving for college is not necessary.

5. I am estimating that the increase in my income will keep pace with general inflation.

6. The house is in very good condition but is an older home which is large (5000sq+) with a substantial yard.

Having taken that into account, here is my budget:

Question: Is there anything I am missing?

Notes 1: My estimates for house maintenance and insurance (1% and 0.4%) are taken from various recommendations online, I don't know if this is a good estimate. Similarly the house cleaning and yard work estimates are guesses, assuming that a bigger house will be more expensive to clean, and a big yard expensive to maintain.

Notes 2: I understand that $600 per week is not enough for a full-time Nanny, but this scenario is assuming that my wife is no longer working. The cost of private school in general is higher than what I have listed but please assume for the purpose of this exercise that I am pricing it correctly here.

Notes 3: There are obviously items in this budget which could be trimmed if necessary. The point is not to ensure that we can survive, but that in a situation where my wife no longer has a job we can still be very comfortable.

added: It was mentioned by @chepner in the comments that it might be better to not deplete our cash reserves entirely and perhaps have a small mortgage. Is there a "minimum" amount of cash we should have in hand after we move in? Does it make sense to take out a small mortgage to have that cash on hand? I expect my wife will work for around 2 years before her job becomes uncertain, so that gives us a chance to replenish some savings.

added: From the comments: I think the fact that your wife's income is as much as yours is pretty important, and should have been disclosed clearly in the question, not offered as an afterthought in a comment. It would also change much of the advice offered. . I guess the reason for not mentioning it was that my idea was to budget for the scenario where my wife leaves her job and the economy turns south and she is unable to get another job. (I know that's not the worst case scenario but it seemed at least a possibility.)

Answer 1

If I’m reading this correctly, your budget is equal to your income. In addition, you are talking about spending your entire cash reserves on the house. Both of these are mistakes, in my opinion.

Taking out a mortgage, as was suggested in a comment, does not help your situation, because then you would have a monthly loan payment that you have no room for in your budget. If you are going to buy this house, it doesn’t make sense to borrow money now that you don’t need now. If you do pay cash for the house and need money later, you can get a mortgage/home equity loan at that time.

Better than that, however, would be to get a less expensive home. If you limit yourself to $1.3 million, as you suggest, you will have $500k left over in cash and no mortgage payment.

You have an incredible income and have done extremely well saving up to this point. If I were you, I would be very careful before making such a drastic shift in spending.

Answer 2

Things that I see are missing:

• Gym membership or fitness related activities
• Entertainment
• Clothing for the adults
• Car maintenance (I assume you pay cash for cars, which is awesome if you do)
• Other insurance including life insurance for you and the spouse, and probably an umbrella policy
• Charitable giving
• Tolls
• Disposable income you, and your wife, can spend without accountability. Even for those with high debt this should be some amount of money, small but some.
• Savings
• Retirement savings

My only editorial comment is that 9k per year is a lot to spend on baby stuff. For example my wife went shopping for our granddaughter this weekend. She purchased a couple of pairs of shoes and 5 cute new dresses. She spent less than $50. I would think half that would be way too much.

Also you do not have to estimate property tax, they have the records online. Also you can probably get a quote on the home owners insurance that is very accurate.

I am a massive fan of being able to purchase a home for cash. If it was me, I would go for the less expensive home for cash rather than taking out a small mortgage. There is a cost of taking out a mortgage and you lose some negotiating power. Please consider it will be emotionally taxing to go from 1.8m to zero, or even in the case of the less expensive home from 1.8m to .5m. That would generate some strong feelings in most people no matter how wise the purchase.

Answer 3

A few observations:

The property tax is a knowable item. My town has a tax of 1.8%, so the $1.8M house is $32,400 per year. A friend in another town 20 minutes away has a tax rate about half of mine, as his town has a lager commercial base, raising enough tax revenue that their homeowner property tax is far lower. In hindsight, choosing a town based on the great school system was not a wise financial move. For us, also with the one kid, we'd have saved enough in property tax to fund paying for private school. We also wouldn't be so eager to downsize from our now too-big house.

Home repairs - Over the 23 years we are in the house, we've replaced the roof ($27K), the first floor HVAC ($12K) and recently, the second floor HVAC & Water Heater ($20K both). If you are buying a brand new house, and not just new-to-you, these are time bombs you should be aware of. Your $18K house maintenance is a good number, so long as you save some of the left over funds each year. However you account for it, the concept is called a 'sinking fund'.

The food seems high. A couple years ago, I tracked food. The three of us totalled $10/day/person, with restaurant meals included. If a large portion of this $20K line item is eating out, you don't account for a sitter.

Others have mentions Car. This is another sinking fund item. A new car has a large cash cost, an older car might have a bit more maintenance. If that $1800 is for 2 cars, that feels very low to me. Our insurance alone is more than that. A car rule of thumb is 50 cents/mile times your miles driven per year which is a number you should be able to estimate accurately.

The way you've presented the numbers, $145K take-home, is curious to me. In my working days (I am retired) I was always aware of my gross income, and never thought 'take-home'. When we bought the house, it cost 2.5X our gross. We financed 80%, and had a mortgage twice our annual income. If your gross is $200K, you are proposing a home purchase that's 9 times your income. Your budget should reflect your values. The 9X number tells me your priority is to have a large, beautiful home. The budget total for house related items is $62K, just over 30% of your gross income, with no mortgage. You make no reference to where the cash came from. Whether it was a one time windfall, or saved from the last decade of living frugally. This is just an observation.

Keep in mind, the neighbors may be in a similar situation, or they might just be doctors/lawyers/VPs of company making $500K+ per year. You may quickly realize you are not able to afford the cars they drive, clothes they buy or vacations they take. Even if we help you look at the numbers, which may work just fine, the social issues shouldn't be ignored. I offer this from my own experience. My wife and I drive the least expensive cars on our street. 5 of the 6 neighbors belong to a country club. 3 have second homes.

If you fill in some missing details, you'll find answers here might be edited to address.

Answer 4

First of all, it's great that you have enough data to lay out a budget based on past spending for many of these categories and that you're thinking about this before making a huge purchase that will change your finances. This is a great start, but I think it requires some refinement.

Your "bad case" scenario doesn't leave much margin at all, and that concerns me. The numbers you laid out may work on a short-term basis if your wife loses her job and gets another one within a few months, but in the long term (six months or more) I would be concerned about the following possibilities:

• How much will property taxes and health insurance premiums increase each year?
• What if your family has a large unexpected medical bill, or a vehicle gets totaled and needs to be replaced? Can you cover those types of costs from your savings? You don't have room in your budget for a debt payment.
• If your wife is not working long-term, she is not going to be contributing anything towards her retirement. Does saving 10% of your income still keep you both on track for retirement (probably not), or do you need to increase this amount?
• You said that you have life insurance. Does your wife? She probably should, even if she becomes a stay-at-home parent. And do you each have enough life insurance?
• Does the utilities line item include heat/cooling, electric, water, trash collection, internet, cable/streaming services? Your estimate of $416 per month seems low given how large the house is plus the fact that it's older.

Your budget has a very thin margin given your income and expenses and I worry that it isn't sustainable. If you're laying out a long-term budget for the scenario where your wife isn't working, I'd encourage you to have more than a $416/month margin (which is the savings rate you noted in your budget). Consider the lifestyle changes that your family would make if your wife stops working. Would you go out to eat less, do less shopping? Perhaps the nanny or home cleaning service costs could be reduced as well if your wife is able to do those things. Those changes should be reflected in your budget. Or, different possibility, maybe your wife would work part time or at a lower-paying job; that income should be included in your budget.