Financial Targets Are Always Moving: Follow Your Own Compass
Financial goals are like shifting sands, always moving just as you think you’ve grasped them. This constant change is often due to hedonic adaptation, a phenomenon where we continuously seek more once we achieve our goals.
Staying financially responsible involves keeping up with the latest economic data, ensuring you’re saving, investing, and earning enough to support your family’s needs. It’s crucial not to find yourself, a decade later, regretting poor financial planning.
Housing costs typically are the largest family expense. I always keep an eye on median home prices and interest rates. When I saw that by 2019 data, a San Francisco household needed a $343,400 income to buy a median-priced home, I was stunned. Years before, I believed $250,000 was sufficient for a family of four to live comfortably in San Francisco, where I’ve been residing since 2001 and tracking my expenses on my blog, Financial Samurai.
It was frustrating to learn that after reaching what I thought was an adequate income level for a comfortable early retirement, the financial goalposts had moved. Despite living well on less than $200,000 a year, the new figures pushed me to reassess my financial adequacy.
Financial targets never stay still. A few months after digesting the $343,400 figure, I came across a newsletter from a real estate agent suggesting that the required income to afford a median-priced home in San Francisco had dropped to $254,052, due to lower mortgage rates and increased incomes.
This realtor’s newsletter pointed out that a household would need a gross income of $21,171 per month to afford the median home comfortably, sticking to the rule that housing should not exceed 28% of gross income. Yet, for those aiming for financial independence sooner, I advise keeping housing costs below 20% of gross income, ideally at 10%.
However, I discovered discrepancies in the real estate data. When I queried a realtor about why there was such a significant gap between their figures and those provided by Compass Real Estate and the California Association of Realtors, they admitted to a calculation error. The correct figure needed was still around $341,000 for a comfortable purchase, not far from the initial $343,400.
These experiences highlight that financial benchmarks, especially in real estate, are often inconsistent and subject to change. Therefore, it’s important to set your financial benchmarks and not rely solely on external standards, which can be influenced by various agendas and shifts in the market.
Remember, the right financial plan is the one that aligns with your personal circumstances and goals. Use data as a guide, but tailor your strategy to fit your life and aspirations, keeping in mind that financial advice is not one-size-fits-all.
Adapting to Financial Targets
Real estate firms might manipulate data to encourage more home buying by presenting a lower required income, but ultimately, you must decide what income level is necessary for your desired lifestyle. Interest rates and property prices will fluctuate, but by securing a low-interest mortgage, like the 2.625% 7/1 ARM I managed to secure, you can significantly reduce your monthly payments and required annual income.
For those wondering how much they need to live comfortably, consider all aspects of your budget. In San Francisco, our family lives comfortably on $200,000 per year from investments, covering all our needs without extravagance. This budget suits us as retirees, not needing to save further for retirement.
Reflect on Your Financial Plans Regularly
Always re-evaluate the numbers you encounter and consider doing your calculations based on updated and personal data. What works for the market may not work for you, and vice versa.
Financial planning is an ongoing process. As your life changes, so too should your financial strategies. Stay informed, stay flexible, and most importantly, steer your financial ship by your compass.
