When mind and math meet: making dreams a reality

a $200,000 house might well have been a $3M house for all that I had any money and that meant I could dream of anything at all.” – The castle on the hill

Flights of fancy were fun but they also tended to trigger an obsessive need to do math. Money math, the kind that leads to speculation and planning and wondering: “can you actually pull this off if….”

I can (and did) run the numbers with just about any big dreamable purchase: a house, a horse, a car, a really big trip. After I’ve satisfied myself that I could have it if I really wanted, under X, Y, or Z conditions, I either filed it away to become part of the grand life/career plan and budget, or I just filed it.

Conventional wisdom typically suggests that housing should cost no more than approximately 40% of your gross take home pay and very few other significant purchases come with even that much of a cautionary tagline. I think 40% or even 30% of your gross is an overcommitment of resources when, and this describes many people, you’re not on a rapidly increasing income.  But I am rather fiscally conservative.

In a relatively stable economy people may earn moderate to good increases which range anywhere between 2-8% depending on the inflation rate, but there’s also an accompanying cost of living increase that has to be assumed.

On that basis, I keep in mind that when I explore housing expenses or do any sort of related math, I am both planning to keep the cost to what I consider a reasonable amount and looking at maximizing my wages to accommodate the new spending and the savings at that life stage. Rather than assuming simple lifestyle inflation, I assume overall growth over time to allow for That Thing.

The sequence of math goes something like this:

  • How many times my salary is that?

  • How many times my disposable income? (for a reality check)

  • How many times my disposable income plus a portion of my savings rate? (for a gleam of whether it’d be possible)

  • And then, how much would I need to make to live my current lifestyle and be able to save enough to buy that house?

Generally, single family homes in California start at around $500,000 and go up from there if it’s anywhere like move in ready and big enough for two people and a pet to do more than squeeze in. And has relatively decent amenities. More commonly, though, real estate is around $800-900K. Which is rather insane.

But let’s say my salary was a respectable $50,000. That would still be many times my salary. $850K is 17x that gross salary. $850K is 20.5x the net salary assuming a 17% effective tax rate.

And if I saved at least 20% of my salary between pre-tax and net-check savings vehicles, that leaves about $33K. I wouldn’t stop this savings since one needs a cash cushion after buying property!

With presumed living expenses of $30000, that leaves $3000 of annual disposable income. That’d be used for things like gifts and travel that aren’t strictly necessary.  Clearly, $850K is many times my disposable income but if I were to substitute in my “current” housing expenses, that still wouldn’t begin to make a dent in that pile of cost, would it?

So, I would need to increase my income by at least 70% to create enough extra cash flow to even think about looking at something like this.

I’m making it really quite simplistic, of course.  A substantial enough down payment which would reduce the loan size would factor into the math, interest rates, details, etc., and so on, but this, as I said this is really just an exercise.

The real fun (Nerd Alert!?) was that it primed my imagination, and gave me concrete goals to aim toward for earnings and career stages every time I found another really cool Thing.

How do you satisfy that itch when you’ve ogled and perhaps cannot have, yet?

About Revanche

Revanche writes the personal finance blog A Gai Shan Life.