Perhaps the most out-of-touch video ever

[jaichind]

Several technical points

1) For an income of $400K, getting a house which is $1.2 is too high unless they are mostly cash which is obviously not true if they have such a high mortgage.  They should target a house which is about 2 times their gross income which is $800K.  This will help on property taxes as well since $24K seems pretty high even a $1.2 house.
2) 529 should really be $20K and not $10K since they have two kids.
3) A $60K car seems high, as a rule of thumb you want a car that costs around 10% of your annual gross income.  Of course since this a 4 member household so there might be a need for two cars in which case $60K is high but absurd.
4) It is not in the pictures but $9K for car insurance is absurd.  Car and home insurance together should be around $5K.
5) What these costs does not take into account would be nursery school which can be fairly expensive in upper income areas.  Of course one can assume their kids are of school going age.  Of course then this does not factor in private school.
6) I am not sure if this family has two income earners to arrive at an income of $400K.  If both parents work, then there is the cost of nannies/baby sitters that this list does not take into account.
7) The utilities and bills of $15K is way to high unless this family are a bunch of energy hogs.
Home maintenance should really not be $25K unless they live in a very old and run down house which means they better in a palace if such a house cost $1.2 million.
9) I think groceries of $30K is reasonable if it includes the cost of going out to restaurants and eating out during lunchtime at work in a high cost area.
10) I think 2 vacations of $25K is high but not absurd as international travel costs will be high.

All things equal, I think if a family lives in a high cost area, one we take out this overly expensive house I think the rest of these costs seems reasonable as they underestimate some costs (child care, private school) while overestimating others. 

[jaichind]

I am not sure about Chicago is that expensive but I can very much identify with what is in this video as far as the greater NYC area is concerned.  My social circle are in the high income bracket and almost all of them have household income of $400K or above, most of them significantly above.  Once they have children as pretty much all of them do, the cost becomes very high.  It is a choice they make but all of them, including myself, make the same choice.  In blunt terms, the choice is to make sure their children lives in and attend school in an area that matches their social-economic status.  But the cost of housing and/or private school is expensive.  Since people in a similar income bracket pretty much make the same choice, they bid up the cost of housing of schooling and as a result, unless they are frugal in other areas, the level of saving they achieve is low relative to what one would expect given their income.  In that sense I very much think the video is in touch with the experience of households in the upper-middle income brackets living in high cost areas.

[jaichind]

The article version of this is

http://online.wsj.com/articles/six-figure-incomesand-facing-financial-ruin-1409936418

part of it talks about this budget

Given how much college costs they really should do $20K for 529s.  Also putting away just $10K for retirement is a disaster even for a family that makes $200K.


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Falling Into a Hole
How does a high-income family spend more than it earns? Consider a hypothetical couple in the Chicago area making $400,000 a year.

They live comfortably, travel frequently and pay the mortgage on a home worth more than $1 million. They send their two teenagers to public school and put away about $12,000 a year for retirement and $10,000 for college tuition.

And when it comes to income and expenditures, they are basically broke.

This couple was created by Northern Trust Wealth Management NTRS +0.69%  at the request of The Wall Street Journal, to illustrate how high earners can end up in the red.

The couple's annual take-home income is $273,000 after setting aside money for retirement and college and after paying U.S. and Illinois income taxes, which Northern Trust estimated based on certain assumptions about deductions and rates.

They spend $87,000 a year on their mortgage, $24,000 on property taxes, $25,000 on home maintenance and $15,000 on utilities, cellphones and other household bills, which Northern Trust considers reasonable examples of what such a family might spend, based on the firm's experience. Groceries for the family of four cost $575 a week, or $30,000 a year.

The family buys a new car every four years, which amounts to $15,000 a year on average, and spends $9,000 annually on car insurance. Their discretionary purchases also include $21,000 a year on dining out and other entertainment, $12,000 in membership dues at a local club, and $26,000 on two family trips and one weekend getaway for the parents.

Add in $10,000 for equipment, fees and other expenses related to sports their children play, $4,000 for gifts and holiday spending, and $5,000 for school fundraisers and other charitable giving.

Suddenly, the hypothetical couple is $10,000 in the hole every year.

Clearly, couples in similar situations can cut back on expenses. The problem is that overspenders are often trying to satisfy both material and emotional needs.

Karol Ward, a New York psychotherapist who helps clients try to control spending, says some people overspend to fit in with peers or a social circle they aspire to join. One client picked up restaurant tabs for friends and associates because it made him feel important.

"It was more about his low self-esteem than generosity," she says.

For high earners in demanding jobs, spending heavily can also help justify long work hours and compensate for time away from friends and family.

"I wanted to reward myself for my hard work," says Robert Bell Platt, who was working as a patent lawyer in Washington, D.C., when he concluded about a decade ago that he and his partner, Mark See, were living well beyond their means.

The couple had six cars, including four BMWs, two speedboats, a townhouse in Alexandria, Va., and vacation homes on Jekyll Island, Ga., and in New York's Finger Lakes region. They enjoyed pricey dinners out every weekend, shopping for gourmet groceries and the latest electronic devices.

Mr. Bell, now 55, grew increasingly anxious. "In the back of my mind I kept thinking: 'This could all come undone in a hurry,' " he says. "We were spending too much and had nothing saved for retirement."

Climbing Out
Sometimes, overspenders need a motive to get back on the road to financial stability.

For Mr. Bell, it was fear. He saw colleagues in their 50s being let go by his law firm. He was particularly haunted by the story of one former co-worker who owned multiple homes and cars and earned in the high six figures; nearly two years after getting laid off, the man was bankrupt.

"I didn't want that to be me," says Mr. Bell, who was in his 40s at the time.

So Mr. Bell and his partner made big changes. They sold two of their homes and four of their cars. They ate at home more frequently. They canceled their cable television and cellphone plans. And they saved $1.7 million for retirement.

Ms. Flores had a similar revelation. She started working for a retirement-plan provider, and part of her job was traveling around the country to shoot a documentary about how Americans were struggling in retirement. She met investors in their 60s and 70s who had once earned six-figures but were now broke.

"I realized I was on that path," she says.

If you get laid off, the motivation is immediate. Don't keep on spending or try to maintain costly appearances. Mr. Bullock, the bankruptcy attorney, says clients who got into financial trouble soon after losing their jobs often weren't willing to scale back their lifestyle.

"They wanted to keep impressing their neighbors and they didn't want their spouse or kids to have to sacrifice," he says.

To avoid such an emergency, create a "thoughtful and long-term" financial plan, says Katie Nixon, the Chicago-based chief investment officer for wealth management at Northern Trust. Count up all income and all required spending, including taxes. Don't factor in "nice-to-haves" such as vacations, she says.

"That will give you a good sense of what is really your disposable income," she says.

People have a tendency to boost spending as income increases, Ms. Nixon says. So consider saving your bonuses and raising your 401(k) contributions. And make a sober assessment of your future earnings power.

Use manageable strategies to help change your lifestyle. Michelle Smith, president of New York-based Source Financial Advisors, suggests picking your indulgences carefully. If travel and dining are important to you, cut back in other areas.

"Making a 25% cut across the board feels a lot more restrictive and suffocating than keeping two or three categories at full tilt, and making a 30% reduction across the rest," she says.

Implementing the changes gradually and adjusting your financial plan periodically to stay on track will make the process easier and more sustainable, experts say.

Mr. Bell eventually quit corporate law and started to work for himself. Because the couple was able to unload so many assets, he was eventually able to start working part time and take a drastic pay cut.

Now he makes far less than many peers, but says he is happier and more relaxed, and no longer lies awake wondering if the couple's lifestyle is sustainable. To his surprise, he says, friends have expressed envy and said they wish they could simplify their lives, too.

His advice to them: "You have a choice. You can cut back before it's too late."

[jaichind]

There is an interesting psychology that happens with people as they progress in their careers and make more money.  Many people continually re-frame things in their head, they convince themselves that they are worth the money they are getting paid. This often moves in short order into them thinking that they are even underpaid for their awesome work. On a parallel track non-essential luxury things which were once out of their realm and reach in their former lives, now become must haves. Because God forbid you dont have the latest car, fanciest modern kitchen, send your kids to the right schools, vacation at tony places etc etc

I can concur with you to some extent that for some people this dynamic is playing out.  Lots of times some of these people are in high pressure management or finance jobs where projecting confidence is critical for their success.  Those best at it can project confidence to themselves and a result make them feel the deserve more credit and income then they are getting.  As for overspending I feel it is an issue of self-esteem.  For me personally I actually make it a game to be as frugal as possible although I drive my DW crazy with this, and she is very frugal herself.  Like I said, spending even for those who are frugal goes sky high once children comes into the picture.  The best days for me in terms of spending was when I was not married yet more than 7 years ago when I had an income above $500K but lived on a budget like someone with a $50K income.  Good days.  Only fly in the ointment was those darn income taxes, drat to Bill Clinton and his 1993 tax increase.   

[jaichind]

Eh, if I were them I would live beyond my means. Might as well enjoy their money while they can, because they'll likely be the first against the wall when the revolution comes.

Not sure if that is the best strategy even if the revolution is coming.  If a revolution is coming does it not make sense to have assets to be as liquid and transportable to another country as much as possible.  Having a bunch of overpriced homes, cars and other luxury items are not that liquid nor transportable so when the revolutionary council takes over, those assets will be the first to be requisitioned.   I guess the excessive international travel/vacations might be worth it as it will get one ready to live internationally when the revolution comes and these 1% have to go into exile and become "White Americans" (much like White Russians in the post-1917 world)

[jaichind]

Thinking about this topic I want to make it clear how expensive it is to raise a child in an neighborhood where a family that makes $400K might reside once we take discretionary spending in to account.  Looking at my own case, I did an analysis of what it would cost in discretionary spending for my three year old child from birth to him finishing graduate school.  In 2014 dollars I worked it out to a bit more than $1 million.  This does not include cost of food clothing etc etc which I consider mandatory spending.  The $1 million include the cost of nannies, nursery school, various classes, taxi to take the child to nursery school/classes, summer camp, a car for him when he is old enough, cost of private university and graduate school.  Note since we live in a good school district we do not have to pay for elementary school and up.  Note that classes of various sorts will add up.  Our son goes to swimming, soccer, and martial arts classes on top of nursery school which works out to about $6K a year.  This will only go up from here.  $1 million could be even worse if it was not the fact that we plan to retire early so there will be no need for nannies once our child is ten or so.  If it was not for that the bill will be even higher.  Note that this family in Chicago has two children so you can imagine this financial burden.  Of course as I pointed out, this is completely discretionary, but around where I live what we are doing for our child is pretty standard.

[jaichind]

I wanted to clarify what my motivation is given the feedback here.  This thread is about how realistic the budget laid out in the hypothetical Chicago household which has a $400K income.  

1) My point is that the cost of childcare seems to be underestimated and I used myself as an example not to complain but to point out that the discretionary costs I incur for our child is quite typical for where I live and it is indeed quite large especially when compared to this hypothetical family.  

2) Of course in my neighborhood medium household with young children (those that are at the peak of their earning power) should be around $600K-$800K by my estimation.  On the other hand Greater NYC is more expensive than Chicago so perhaps where this hypothetical family lives is comparable to where I live.  

3) In my particular case, while these typical costs are high, they are well within our means and for sure I do not want to come off as complaining about it.  Like I said, they are discretionary, so if they are not within our means then I will just choose not to spend it.  On the other hand, some of my neighbors that might have lower household income than myself might feel stretched with these costs but they end up spending it as that is the norm here.  They could move out but they want to be with their social-economic peers so there it is.  They can and should take complete ownership of this choice.

[jaichind]

It's kind of pointless to discuss how expensive something is after you've chosen to make it a lot more expensive than it needs to be.

If I went to McDonald's and ordered multiple portions of every menu item, it would be relatively expensive by fast food standards. That doesn't make "McDonald's is really expensive" any more valid of a statement.

It is true that if you want your kid to go to an Ivy League school (a "real" one, not Cornell or Dartmouth or Brown, sorry...) and follow the stereotypical MBA-->Goldman Sachs/McKinsey/etc-->Manhattan penthouse and Hamptons house trajectory, those boldface items are necessary and not even sufficient.

Someone like jaichind isn't going to ask where that leaves children whose parents cannot provide those things for them and what the ramifications are for their future success or lack thereof. He's going to say, "Screw them, I've got mine. But au pairs and lacrosse camp sure aren't cheap."

My position is somewhat different then that.  My view is mostly one of biological determinism where I see what my child raw cognitive capabilities, be it high or low, as mostly "baked in" at this stage assuming reasonable environments and all these parenting and classes would not add much.  My job as a parent is mostly to provide a reasonably good environment and we have more than meet that criteria.   It is my DW that is the tiger mom that comes close to the views listed above.  She and I have all sorts of arguments about this.   So why do I agree to all these classes?  Mostly because I want my child to progress in social skills and emotional intelligence which could only take place in these extra class settings (be it sports, music or whatever) versus being at home with his parents and his nanny.   That for me is often the missing skill that many people lack in the private sector.  I for sure could do much better on this axis and want my child to get a early start on that. 

And yes, au pairs and lacrosse camp are expensive but I got it covered.  Also, I hate the Hamptons and do everything possible to avoid going there when invited by my friends.