If you are still with us, great! If I’ve hit a nerve, that’s okay too. So far, we’ve covered moving to a cheaper area, not getting a pet and reducing small spending. Next up on the unpopular list of ways to save money: buy less of a house than you can afford.
How Much It Can Save You
Most people decide how much house they can afford simply by looking at the monthly mortgage payment. Stretching your budget to its limit… or beyond! Let’s look at it from a different perspective. How much are you giving to the bank to live in their house while you make 360 consecutive monthly payments? An amortization schedule will help show us how much you can save by living in a more modest home. Instead of buying a $200,000 home, you bought a $125,000 home.
- $200,000 = Monthly Payment $1,074 = Interest Paid $186,512
- $125,000 = Monthly Payment $671 = Interest Paid $116,570
That’s a savings of nearly $70,000 that can be invested in other ways over a 30 year period!
Why People Hate It
You’ve decided you want the American Dream! A little house to call your own and a mortgage to boot. For most people this will be the single largest purchase in their lifetime. It is also the most they will ever pay in interest and we know that debt costs a fortune.
Here’s how the deal usually goes down. You contact that person you went to high school with who is now a real estate agent. They are so excited to help you… and also to make a quick buck off of your purchase. Your new best friend says you need to get pre-qualified by a bank to find out how much you can afford. They know just the person you should talk to as well! The banker and your realtor want you to spend at the max of your budget, because the more you spend the more they both make off of your purchase.
If you get approved for $200,000, your realtor will start by showing you homes priced at $219,900. Most people have eyes bigger than their wallets. So they will reach for the stars when purchasing their “Dream Home”, not considering how to furnish it, pay its utilities, maintain its structure, etc. Research detailed in Stop Acting Rich: …And Start Living Like A Real Millionaire proves that the more house you buy, the higher your costs will be in many other areas.
The Excuses They Use to Refute It
- I am just out of college. I will make more money as I gain experience.
- I have been with my employer for X years. I always get a bonus and X% raise each year.
- The housing market increases in value every year by X%.
Why the Excuses are Invalid
No one plans on having a financial crisis in life, but rest assured that everyone will feel a financial pinch. A change in jobs, a loss of a job, daycare costs, illness or injury to you or a family member, home maintenance and car repair costs. The pitfalls of life are plentiful and unpredictable.
Mr. Just-out-of-college may make more money in the future. Then he will find a way to spend it. He will find a significant other to spend it on, buy a nicer car or a bigger TV, they get married and take vacations. How much more does that next promotion pay? He needs it!
Mrs. Long-term-employee goes to work every day doing her job, never thinking that her job may be outsourced, replaced by a computer or that she needs to get continuing education to keep the job. The company that gives annual raises and bonuses will hit a rocky financial stretch too, but they watch their finances closer than you or I. If they cannot afford to give you a raise this year, they won’t. Even if they have the past 10 years. No bonuses this year either, the sales team didn’t hit their numbers.
In 2008, the housing market crashed and many found themselves upside-down for the first time on their home loans. Those with popular adjustable-rate mortgages may have even seen their payments spike at the same time the home’s value bottomed out. The value of many homes were affected by mass foreclosures. If you went with the biggest mortgage you could find, this period of uncertainty may be all it takes to ruin your personal finances. The housing market’s averages are not guaranteed.
The more house you buy, the higher your costs and the lower (on average) your net worth. It’s true that the house you buy determines your wealth. The reason why so many homeowners today are having a difficult time making ends meet goes way beyond mortgage payments. When you trade up to a more expensive home, there is a new pressure for you to spend more on every conceivable product and service. Nothing has a greater impact on your wealth and your consumption than your choice of house and neighborhood. If you live in a pricey home in an exclusive community, you will spend more. Your ability to save and build wealth will be compromised.
What we don’t realize is that the true cost of living in certain homes and neighborhoods is unseen but truly devastating. The greatest detriment to building wealth is our environment. Human beings have an innate tendency to act and be like those around them — to fit in — and even compete. If you live in a pricey neighborhood, you will act and buy like your neighbors.
Affluent neighborhoods are a vortex of sociological forces. It is a marketing fact that residents of more affluent neighborhoods spend more on just about everything. From cars to haircuts and from wine to watches they spend more. We take consumption cues from those around us.
Research has shown that most people who live in million-dollar homes are not millionaires. They may be high-income producers, but they are living a treadmill existence. In the United States, there are three millionaires living in homes with value of under $300,000 for every one living in home valued at $1 million or more.
The Optimal Financial Solution for You
No one wants to do it, that’s why we hate these money saving tips! But here is what you should do instead. Buy a house you can afford. Your monthly mortgage payment should not exceed 28 percent of your gross monthly income (your income before taxes are taken out). Even better, consider going lower than 28 percent. If you do it the right way, you can buy a great house and have it paid off in 10 years! Imagine the money you’ll save and can now invest — propelling your net worth higher over the decades to come.
And as an alternate suggestion, consider foregoing a house purchase for yourself and instead invest that money in a rental unit. Then your money doesn’t cost you but actually works for you to help grow a solid net worth. (One great idea is to buy a multi-unit place, live in one apartment, and rent out the others.)
Let go of the dream home mirage and have the Dream Life!