The Bay Area is a beautiful place to live. Mountains, beaches, great weather, robust economy, wine country, great food, active inhabitants, etc. However, making a life here is no small feat. To break even in this area you have to gross $250,000 as a family. To make this much money most families need to have two income earners, but when you have young children you either sacrifice one income or pay exorbitant amounts for childcare.
The most common question I get is “How do people do it?” Good question. To find out let’s look at the biggest costs:
Housing Median home prices broke the $1million mark in March 2016. The average cost per square foot in Marin is $531, a 20% increase over last year, but from what I have seen it is closer to $1,000 per square foot in most homes in which you want to live.
First, you need a down payment. You can get by with 15% but then banks use a trick to get you to put down more. Their third party appraisers come back with a lower value than needed for the original loan, and you have to put down more money any way… so you end up needing about 20%. To get this 20% (~$200,000 for the median home), you either need to make significantly more than $250,000 per year and save up, have an equity event through work, or inherit/receive a gift from a very generous parent.
Second, accept the Death of the Starter Home. Housing prices are up 6% since last year and are projected to go up 0.7% over the next year. If you buy now are you buying at the peak? What is your timeframe for living in this house? Back in 2009 during the financial crisis, homes in my neighborhood were selling for $675,000 to $750,000 range. Today, those houses would sell for well over $1million. Good timing on those who bought at the trough! But they can’t sell their house because where would they go? So, if upgrading is not an option, you remodel. That’s an article all to itself.
If you can afford the down payment and can commit to being in a house for at least 8 years, home ownership can be the right move. If not, embrace renting! Home ownership is a very American goal. In most developed countries, more people rent than own homes. In the U.S., approximately 68% of people own homes. In Austria, Germany, Switzerland and Denmark, home ownership is closer to 40%.
While rental rates seem ridiculous and equal to what you might pay with a mortgage, if you don’t have the down payment for a house and cannot commit to being in a house you can afford for 8+ years, renting is your best option. The rule of thumb is keep all housing related expenses less than 32% of your gross income.
If you are making the $250,000 it takes to breakeven in the Bay Area, roughly 28-40% of that is going to taxes. Not only does California have high tax rates, once you are making over $250,000 you are subject to Alternative Minimum Tax (AMT), which was originally designed to catch wealthy people and make sure they are paying their fair share of taxes. Now it hits most dual income families. As a percentage of your income, taxes seem to be the highest for those who make between $250,000 and $425,000. These folks are subject to AMT, itemized deduction phaseouts and phaseouts to personal and dependent exemptions. Once you tip over $425,000, you revert back to marginal tax brackets.
Child Care and Education
Childcare is necessary for dual income families but it does not last forever. I just made my last pre-school tuition payment! Keep in mind that your cash flow will get better once your children start public school. If you live in the city or have a child that would greatly benefit from a private school setting, your child related spending may continue to be one of your biggest expenses. From a financial perspective, you are better off buying a home in a great school district than spending money on private school education. But if private school is a priority, make sure to apply for financial aid. If you are making less than $250,000 as a family, you would be surprised how much assistance you might get.
Can you live in the Bay Area and make under $250,000? You can, but you most likely cannot save money to put towards other goals like college, extra retirement or saving for a house. For most, the qualitative benefits of living around San Francisco are worth the money. My advice to anyone who wants to get ahead in the Bay Area is as follows: 1) Diversify your income streams, 2) Keep “needs” versus “wants” in check (this can be a trap and distract you from your priorities), and 3) Be a part of your community. No amount of money can buy the “roots” most families seek to build. The connections to your neighbors and community come from spending time and taking interest in common goals. I think this has been forgotten in the race to get ahead.