5 ms·
The reasoning here seems wrong. Yes, > "the rule of thumb is that you shouldn't spend more than 30% of your monthly take home on rent", as they say, but that'
by azakai 11y ago
The reasoning here seems wrong. Yes,
> "the rule of thumb is that you shouldn't spend more than 30% of your monthly take home on rent",
as they say, but that's just a rule of thumb. What actually matters is how much money you end up with. For example, assuming taxes remove 30% of income (probably close enough; would need to look up federal and state tax codes to be precise),
1. A Zynga employee makes 147,000, loses 30% to taxes, spends 3,545 times 12 on rent, and ends up with 60,360 to spare.
2. A RadPad employee makes 120,000, also loses 30%, and spends 1,475 times 12 on rent, giving them 66,300.
In other words, while the Zynga employee spends 47% on rent, and the RadPad employee a mere 23% - less than half! - the difference is much smaller than that would imply. At the end of the year, the RadPad employee has an extra 5,940.
Certainly a significant amount of money, and noteworthy in that the person has a lower salary but still ended up with more income after taxes and rent, but the amount is in the single digit percentage of the salaries we are talking about here.
More importantly, the problem becomes more obvious if we look at second place after Zynga. Doing the same calculation on a Google employee, then we get that despite paying 42% on rent, the employee is left with 71,128, which is more than the RadPad employee.
In other words, looking just at % of take home spent on rent is a useful rule of thumb, but looking at the actual money is better, and it can lead to different conclusions than the article would imply.
edit: Perhaps the best conclusion from their data is that it actually doesn't matter where you live, since salary actually compensates surprisingly well for location. Whether you work at Google or Zynga in SF, or RadPad in LA, you'll end up with +- a few % of the same amount of money in your bank account anyhow.
- rconti 11y agoIndeed. The cost of living is a powerful multiplier as long as you don't overspend. The same car is that much cheaper in a high COL area, you can contribute more to your retirement, and so on. The problem with living in a low-COL area is, even if you save a very high % of your income, you're "stuck" and unable to move somewhere cheaper. There's a reason New Yorkers retire to Florida. You have options. That doesn't mean it works for everyone, but do your own numbers and make your own decisions.
- eastbayjake 11y agoThe other faulty reasoning here is that living without roommates is a reasonable expectation for most single, urban twentysomethings. Most engineers I know have roommates as much for social reasons as economic reasons. If you take most of those two bedroom rents and look at the cost per month per room, most are less than 30% of after-tax income. (And that's if you choose to live in SOMA, which also seems like an extravagant and uncommon choice for most engineers I know, many of whom are happy with a short commute to the Mission, Pacific Heights, or Oakland.)
- dopamean 11y agoThe Venn diagram of your friends and my friends must have no overlap. I know quite a few people who live in SF and not a single one has a roommate.
- ecdavis 11y agoThe 33/33/33 rule aims to provide you with enough savings to cover your current cost of living in retirement. It's based on the assumption that your cost of living won't drastically change in the meantime. That assumption breaks down when you're living in a very high cost of living area where you don't intend to retire. I doubt that very many people who live in 1BR apartments in downtown SF will maintain that lifestyle into retirement.
- davidw 11y agoRealistically, they won't maintain that lifestyle once they have kids. One of the reasons I got out is that it was too weird living in a place with tons of 20-somethings (I was one too, at the time) and not a lot of everyone else.
- dkns 11y agoFor those who don't know 33/33/33 rule is it rent/expenses/savings?
- ecdavis 11y agoI think it started as expenses/spending/saving but has now become rent/other expenses+spending/savings. Recently I've seen other "rules" emerge which are far heavier on the expenses. Fidelity, for instance, suggests a 50/15/5 split between expenses/retirement savings/short term savings. I think having such high expenses is pretty risky, myself.
- cpncrunch 11y agoYou are underestimating the taxes. The simple way to get the after-tax income is just divide the annual cost of the 1-bed apartment by the % of salary and multiply by 100. The google employee only keeps $56k after paying for the 1-bed apartment, if my calculations are correct (compared to $59k for the RadPad employee). If you do the calculations with 2-bed apartments the numbers are much worse for SF. Google employee gets to keep $39.5k, compared to $53.5k for the RadPad employee!
- avasylev 11y agoProblem with high housing cost is that it drives up prices for all things in the area - from fastfood to haircut and day care. Of course iPhone, cars cost the same, but all the local services would cost more.