Life and debt in suburbia

(MONEY Magazine) -- The 5:22 evening train from Philadelphia arrives in Wallingford, a leafy, peaceful suburb 11 miles west, at 5:48. Passengers depart holding briefcases and newspapers; some are met by cars, but most just walk home. And why not?

Nearly every home in this town of 13,000 is within a 20-minute stroll down streets flanked by stone colonials, rolling lawns, spacious flower beds and weeping willows. It's a place where everyone seems to have made it, but not too much.

Three suburban families got together to talk about their finances. One family found out they were doing a lot better than they thought. The other two weren't.

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There are few mansions or even McMansions in town. Most people drive mid-size sedans or SUVs. If there is a place left in America where people embrace being middle class, Wallingford is it.

Ernie Wright, 39, does the commute most weeknights. Two years ago he and his family moved from Philadelphia looking for just this kind of comfortably upper-middle-class community - a place where they would feel at home. And usually they do. That is, except for an occasional niggling feeling that most of their neighbors are actually a lot better off than they are.

Marni Baker Stein and her husband Stuart moved to Wallingford a few months ago looking for a bigger house and a community of peers.

In their old neighborhood, crammed into one of the smallest houses on the block, they felt poor. Now, living in a five-bedroom colonial on an acre of land, they feel a lot better about money, even though their actual finances haven't improved.

Dave and Emily Mendell, who live a few doors from the Wrights, moved to town two years ago for the good public schools, but there's another reason they feel good about their life in this neighborhood. Here the Mendells' family income puts them above average. "We wouldn't feel comfortable in a place where most people made more than us," says Dave Mendell.

Who would? Assessing how the neighbors are doing financially and what that means about how we are doing is practically a national pastime. The guessing game starts off as harmless pillow talk and community pool chatter, an outgrowth of natural curiosity. Just how much money must Susie and Bob have to be able to afford that new kitchen, three cars and a family safari?

Then too, every homeowner has a vested interest in the financial well-being of his or her neighbors. Homeowner associations have long understood that nothing raises the value of a home more than an expanse of trim lawn and well-kept homes on either side.

But the finances of those around you affect more than just the perceived value of your property. They also, like it or not, help shape how much you spend and save and color your perceptions of your own financial well-being.

Robert Frank, an economist at Cornell University and author of Falling Behind, calls the desire to match what the neighbors spend, remodeling project for remodeling project, lavish party for lavish party, "luxury fever."

Not only can it prompt you to spend beyond your means, but it can also lead you to a false sense of how you are doing financially. Because when you see the guy down the block with so much more cool stuff than you have, you can't help but assume he is financially better off - even if the real truth is he just can't keep his credit card in his wallet.

Without pulling back the veil of polite secrecy that neighbors maintain about their financial status, it's hard to tell.

This story helps pull back that veil on three families on a street called Willow Lane in an idyllic upper-middle-class American suburb. (Wallingford is so idyllic, in fact, that it was No. 9 this year in our annual rankings of the Best Places to Live.)

The Wrights, the Steins and the Mendells are strikingly similar at first glance. They moved to town recently, are in their late thirties and early forties, grew up in middle-class families, graduated from good colleges, have professional jobs and are raising young kids. All three earn a comfortable living and borrowed about $300,000 to buy their homes.

In terms of their financial security, however, they are at quite different places. What's more, none of the families had an accurate picture of how they are doing, in part because they unconsciously measured themselves against their neighbors, and their assessment of those neighbors is wrong.

The Mendells and the Steins, for instance, thought they were better off than they are, while the Wrights, who feel they are struggling to keep up in Wallingford, actually have saved the most.

But the critical thing these families discovered is this: When you pull back the veil of your neighbors' finances, you see not only them but yourself more clearly.

Four months ago, Marni Baker Stein and Stuart Stein moved to Wallingford, paying $468,000 for a five-bedroom house on an acre of land on Rabbit Run, around the corner from Willow Lane.

In their old neighborhood in Wayne, Pa., the Steins felt poor in comparison with other families and unequal to the task of keeping up with their neighbors' conspicuous consumption. Evidence that people were wealthier was everywhere.

"Even the three-year-olds were dressed in designer clothes, all the way down to their shoes," says Stuart, 40, a sound technician. "You don't buy expensive shoes for a kid. Kids' shoes should come from Target."

The move to Wallingford has, almost magically, made them feel a whole lot better about their finances. That's because, the Steins say, a lot of people in the neighborhood seem to be at the same level as they are.

Yes, there are still some houses that are bigger than theirs, but even those houses have Tauruses parked in the driveway. Says Marni, 40, an administrator at the College of General Studies at the University of Pennsylvania: "You don't hear about people going to Aspen for Thanksgiving here."

In reality, moving to Wallingford hasn't improved the Stein's finances. In fact, despite a seemingly comfortable combined income of $132,000, their cash flow is a little bit worse than before because they have a bigger mortgage and higher property taxes.

All told, their house payments now run $32,000 a year, up from $22,000 in Wayne. Their other big expenditure: $26,000 a year for a full-time nanny for their three children, Eva, 3, and twins Neve and Lila, 2. Then there are all the myriad costs of a young and growing family, from diapers ($70 a month) to groceries ($800).

But the biggest drain on the Steins' finances is their lingering debt, run up mostly to pay for costly fertility procedures. In late 2001 after a year of trying and no baby, Marni learned the couple were going to need help to get pregnant.

Health insurance covered only part of the treatment that followed: three failed attempts at artificial insemination, followed by in vitro fertilization. Thankfully, the IVF worked on the first attempt. After Eva was born, Marni become pregnant again the same way - this time with twins. Their total out-of-pocket maternity costs: $32,000.

The Steins say they never questioned whether to pursue treatment, even though they didn't have the money to pay for it. They figured they could cover the bills with a credit card and pay off the balance over time.

"We rationalized it by saying the cost is similar to buying a nice car," says Marni. "And kids are worth a lot more than a car, so it seemed cheap."

But if spending whatever it took to have kids didn't seem like much of a choice to the Steins, what they subsequently did about their debt was. They mostly ignored it, paying only the minimums and adding to the balance when big bills cropped up, like repairing the roof and their air conditioning.

They now owe nearly $39,000 on five different cards, including nearly $1,200 on an American Express account with an interest rate of 30.21 percent. The minimums alone run the family $700 a month.

The result is that the Steins live mostly from paycheck to paycheck, saving very little. They have contributed just a few hundred dollars to retirement accounts in the past year (current value: $88,000) and have nothing saved for college.

Still, Marni's plan to solve her family's financial problems is not to cut spending and pay down the debt. Her idea involves going further into debt so that she and her husband can get additional training to help boost their income.

Marni is working on a Ph.D. that will add $18,000 in student loans to the Steins' balance sheet by the time she finishes next year. Stuart plans to take a $5,000 management course. "I don't think watching our expenses will be enough," says Marni. "The only way we really could be better off is if we make more money."

--Find out how the Steins can stop living from paycheck to paycheck here.

Dave and Emily Mendell do make more money than the Steins. Much more.

Dave, 39, teaches fourth grade in Wallingford's elementary school. Emily, 38, is vice president of strategic affairs for the National Venture Capital Association. Together their annual income is $250,000. On Willow Lane, theirs is the biggest house on the block.

But for the Mendells, earning more money hasn't been the ticket to financial security their neighbors imagine it would be. Like the Steins, the Mendells are behind in saving for retirement, especially considering their high income and the fact that they'd like to stop working by the time they're 60. They've saved very little for college for sons Noah, 9, and Chase, 7.

True, like the Steins they're paying more for housing in Wallingford. Their five-bedroom colonial cost $100,000 more than the house they sold in nearby Broomall when they moved to Willow Lane two years ago. And their taxes have quintupled to $20,000 a year.

But what really diverts cash from their savings kitty is the cool stuff they like to buy. For instance, Dave, who loves to surf, recently bought an $800 custom-made, handcrafted board. He has three guitars, plus a fourth for Noah.

For the kids they bought a trampoline and a swing set for the backyard. Emily, nearly a black belt, spends about $3,400 a year on karate lessons for herself and the boys. Dave prefers yoga classes ($1,200 a year).

The Mendells would also like to finish their basement ($30,000), and Emily wants to trade in the family's minivan for a Mercedes M-Class ($40,000). Then there were the separate vacations Dave and Emily took to Costa Rica over the past year and the family trip to the Grand Canyon (total for travel: nearly $8,500).

That still leaves $600 a month unaccounted for. Emily, who says she has a problem saying no to her kids, admits some of it is spent on impulse purchases for the boys, who regularly return from trips to Target with a new toy.

"When we're at the mall and they ask me to buy something, what do I say? 'We can't afford it'?" asks Emily. "We can."

But the price of the high life is, well, high: The Mendells contribute only $12,000 a year to their retirement and have just $176,000 saved in those accounts so far. That's less than a tenth of the $2 million they'd need to retire at 60, even taking into account Dave's teacher's pension.

And the Mendells haven't put what savings they do have into the kind of growth investments that could help bail them out. In fact, nearly half of their retirement contributions now go into cash.

Just as the Steins' debt doesn't bother them, so the Mendells don't seem concerned about how little they've saved for retirement. They say their parents managed their retirement just fine and they were not as well off.

And they don't think they're spoiling the kids; Noah and Chase have to do chores to earn their allowance. Recently Emily did get nervous about their lack of college savings and opened 529s for the boys, planning to deposit $500 a month in each account.

But at that rate, they'll only save enough to cover about half the cost of the kids' college education. True, that's better than most families manage, but most families don't make $250,000 a year.

Still, the Mendells don't worry about whether they're spending away their future. "We question whether we are too nervous about spending," says Emily. "Should we be enjoying our life more?"

Dave says he knows a lot of people in Wallingford who spend more than they do. Plenty of his surfing friends have houses at the shore, but he and Emily won't buy a second house because it's out of their budget.

"We're not penny pinchers, but we can't spend without thinking about it either," says Dave. But he adds somewhat wistfully, "That would be a nice goal."

--How can the Mendells plan for their future? Click here to find out.

When Ernest and Miriam Wright traded in their downtown Philadelphia row house for a four-bedroom on Willow Lane 2½ years ago, they hoped to swap city life for a suburban idyll. No more urban anonymity and late-night howls from the drinkers at the bar next door.

By and large, they found what they were looking for. Other families on the block welcomed the Wrights and invited them to join their regular get-togethers. Daughters Jillian, 4, and Lauren, 2, quickly found playmates. Their dead-end street is silent, even in the summer, by eight.

And there was a bonus: The bigger house in the burbs actually cost less than their home in Philly (though they did take out a larger mortgage to pay for it), giving the Wrights a $100,000 cash cushion.

But the price of fitting into their new neighborhood has turned out to be a lot higher than the Wrights bargained for. With a bigger mortgage and higher property taxes, they're spending nearly $1,000 more a month on housing than they did in the city.

Then there are the incidentals of life on Willow Lane. Landscaping cost $1,500. Remodeling the 20-year-old kitchen cost $25,000. They've upgraded to a Subaru Outback from a Volkswagen Jetta.

And next year they'll spend $13,000 to send Jillian to kindergarten at a private school in the more exclusive part of town - even though the town's highly rated public schools are a major draw for Wallingford.

Jillian attends preschool there now. And being in a school with freer-spending families has already influenced the Wrights' habits. Miriam says she lays out nearly twice as much on Jillian's clothing as she did before they moved, shopping at stores that she used to dismiss as too expensive. She says, "All the other girls are dressed that way, so I spend more."

Earlier this year, a local boutique had a private shopping night for the mothers at Jillian's school. On the way there, Miriam, 39, promised herself she wouldn't buy anything. But after watching some of the women drop $600, she ended up spending $150 herself.

Still, by Willow Lane standards, the Wrights' spending isn't over the top. They're the only family on the block with one car, and haven't taken a real vacation in years. "We'd love to travel like the Mendells," says Miriam. "I don't know how they afford it."

Even without vacations, though, the Wrights, who make a combined $85,000 a year, are coming up a few hundred dollars short every month, sometimes nearly a thousand.

Ernest is a budget analyst at the University of Pennsylvania (where Marni Stein also works), and he knew they'd be spending more than they earned to live in Wallingford. But he thought the shortfall would be temporary since Miriam, a former corporate recruiter who quit after the kids were born, planned to go back to work.

But she's had problems finding a job that pays close to her former $65,000 salary (to bring in extra cash in the meantime she works part time as a supervisor for ticket collectors at Philadelphia Eagles games). Some interviewers tell her she is overqualified; others balk at the fact that she hasn't worked in three years.

The result: In two years, the Wrights have blown through $60,000 of the money they banked from the sale of the house in Philly ($40,000 is left) and have $7,000 in balances on their credit cards.

What they haven't done: They haven't stopped saving. "I don't want to be 80 years old and poor," says Ernie. He routinely puts 5 percent of his salary into his 403(b) plan, which earns the university's highest match. Miriam too has nearly $80,000 in retirement savings accounts from past jobs. And both plan on working until they're 70.

All told, the family has just over $200,000 in retirement savings, which puts them well on track to meet their retirement goal - and when it comes to long-term financial security, puts them ahead of both the Steins and the Mendells, despite their lower income.

On a recent weekend in August the three families met at a barbecue on Willow Lane. Over pulled pork and macaroni and cheese, they talked about their careers and their lives, and their similarities seemed more striking than their differences.

Dave, the schoolteacher, and Marni, the college administrator, talked about education. Stuart and Miriam talked about their desire to earn more money. All the families admitted they make most of their financial decisions on the fly and cross their fingers that it will work out in the long run.

But their greatest common bond, despite the differences in how much they make and what they spend money on, is that all three families have made choices that, unless corrected, jeopardize their financial futures.

--How can The Wrights get their finances on track? Click here to find out.