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The Northwest Washington lifestyle trap: $500,000 in income and still can’t save

As financial adviser Lori Atwood puts it: “People say getting rid of x, y, z is not an option. Groceries, electricity and heat are not options. Anything else is on the table.” (Ricky Carioti/The Washington Post)

Washington-based financial adviser Lori Atwood has untangled many a financial mystery for her 400 clients, like this gut-buster: How does a family of four drop $500 in one month at McDonald’s?

That’s a lot of Big Macs and Filet-O-Fishes. But when you have a husband and wife with high-powered jobs working 10 or 12 hours a day, who feels like cooking?

Atwood’s mission isn’t all about writing wills, picking life or term insurance, and improving your credit score.

It’s about controlling spending habits and learning to live within — or ideally below — one’s means. She calls it “trapped by the lifestyle.”

“People are stuck on this treadmill, working, working, working,” said the 50-year-old University of Pennsylvania graduate. “They make $250,000, $500,000 a year and they don’t know where their money is going. They don’t have any savings. It is true but ridiculous.”

No one is immune. My wife, Polly, and I kept a list of savings and spending principles on our refrigerator door for years. You hear them all over and over, but people need to be reminded.

My wife and I are frugal and good little savers. Nevertheless, Polly, who pays the bills and does the taxes, suggested last weekend that we ease up a bit on the dining out. When she looked at our annual tab for restaurant dining, the amount was too large for something that wasn’t particularly special.

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Many of Atwood’s clients hail from the leafy confines of Northwest Washington, home to some of the most sought-after neighborhoods in the region, if not the country.

But her clients live all over the area and have incomes across the spectrum.

“I have 26-year-olds making $50,000 and people who are independently wealthy don’t work,” Atwood said.

Atwood projects that her business revenue will hit $200,000 this year from the $185 per hour she charges clients and from a software platform called Fearless Finance that she began selling in February. Fearless Finance costs $59.99 for an annual subscription or $32.99 for a do-it-yourself application that allows users to track expenses. She is hoping it will take her business to a national audience.

I asked Atwood why someone should buy Fearless Finance instead of Quicken, a popular tool for managing personal finance.

Atwood said she designed the Fearless app to be a full 360-degree view of your finances that is easier for financial neophytes to use than Quicken. Fearless offers advice and recommendations, whereas Quicken is more of a tool.

“Quicken is a wrench and great if you know how to use it,” she said. “Fearless Finance is more like the plumber who gives you tools and tells you how to fix it.”

Atwood, who has a background in technology and finance, approaches household spending like a pathologist doing an autopsy.

“We do a whole cash-flow analysis. We have to figure out what is coming in and what is going out,” she said. “What they are making. What they are spending.”

Many clients have systemic problems such as fixed costs that eat up the majority of their income, leaving too little for savings and emergencies.

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The usual suspects when it comes to gobbling up money are housing, day care and student loans.

“If the mortgage is $5,000 a month and day care is $3,000, and they have significant student loan payments, and they bring in $13,000, $14,000, $15,000 take-home, that leaves very little left over for the electric bill,” Atwood said. “The first thing I am looking for is are they overcommitted on fixed costs?”

“Over-housing” is the culprit that snares many people into the Northwest D.C. lifestyle trap.

“They don’t have to have the house they own,” Atwood said. “There are times I have said, ‘You have to move.’ ”

She doesn’t blame them for having aspirations. Most urban upscale neighborhoods are expensive. People want to live there. They want their kids to go to certain schools, public or private. But the housing costs — buying or renting — are savings-killers.

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“If you want to live in an urban area,” she said, “you know you have to slow down — not stop but slow down — on discretionary things like eating out, activities, entertainment and clothes to make sure you have the money for housing costs.”

People need a reality check.

“I tell them we have to spend less and make sure their cash flow is secure,” she said. “They must consistently spend less than their take-home.”

Take groceries. (I love my Whole Foods trips.) Atwood said a family of four should spend about $1,200 a month — or $300 per person — on groceries. She has families of three or four members spending $2,000 and more each month.

Then there is child care. Two children can rack up $5,000 a month in expenses when you figure in child care, after-school care and an au pair. The hole gets deeper with summer camp, music lessons and private school tuition.

“I have some people where nothing is too good for junior,” she said. “It’s not a pleasant conversation when we talk about trimming. People say getting rid of x, y, z is not an option. Groceries, electricity and heat are not options. Anything else is on the table.”

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Atwood should know the Northwest D.C. lifestyle. She lives there and sends her 10-year-old daughter to public school. Her husband is an attorney. Her only concession to the “lifestyle” is the car she leases. She would not tell me what she drives, but you can bet it’s not the 2005, $12,000 black Civic with roll-up windows that I drive.

She rents an office by the hour at a downtown workspace on Connecticut Avenue and K Street NW. Her biggest expense has been building the Fearless Finance software, which cost tens of thousands of dollars to create.

Here is something from Atwood to put on your refrigerator door:

* Prioritize. Try not to live each month to the very last dollar you earn.

* Always have about $3,000 to $5,000 if you are a homeowner and $1,500 if you are a renter in liquid savings for non-discretionary expenses that come up such as home repairs and root canals. If you don’t have this, the only place to turn when your dog swallows a one-pound bar of dark chocolate and needs its stomach pumped (happened to me, but we had savings for it) is to use credit cards.

* Never use a credit card with a balance for daily needs. You will never pay it off.

* Try to make sure your fixed expenses — housing, child care, car payments, student loans, credit card minimums — are no more than 43 percent of your household take-home pay. Anything above that percentage generally means you will feel financial stress.

* Spend less than you earn each month.

* Make trade-offs for discretionary expenses. “Should we eat out? No, let’s use the money instead for Susie’s soccer camp.”

* Never say “might as well” when it comes to a purchase if you don’t have the money on hand.

* Decide between what you must have and what is optional. Only the basics — housing, utilities, health, groceries, transportation — are “must haves.” Everything else is optional and ripe for trimming.

* Track your discretionary spending closely. That’s where the train goes off the tracks. Your utility bills are predictable. Your outside dining is not. You can change where and how much you eat so know where you spend so you can trim.

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