When I moved from Atlanta to New York City to start my dream job at CNBC, and started looking for apartments, I almost hyperventilated at the prices. Keep in mind, this was during a brutal recession when rental prices had supposedly belly flopped. One-bedrooms I looked at ranged from $3,000 to $5,000…a month. I had to manage my expectations, and fast.
So I ended up renting a smaller place in a less fashionable neighborhood, and sticking to my budget. On the one hand, I had to give up charming, brick-lined streets and walking to yummy restaurants. On the other hand, I was close to the highway, which made it easier and more cost efficient to get to my new job at CNBC (which was good, because as the new anchor for the early morning show I typically headed into work around 1:00am).
Yes, housing will make or break your financial foundation. And I’ll tell you from all of the time I’ve spent helping people untangle their financial messes (not to mention untangling my own) that housing is one of the top three things people go to financial planners to figure out. So, trust me—resign yourself to these three truths and you will have a much happier home:
- Don’t spend more than 35% percent on housing. Period, end of story. Where you live is important (obviously), and of course we all want to live in a nice place. On the other hand, because a home is one of your largest expenses, what you decide to spend will have the greatest impact on the rest of your Spending Plan, a.k.a. what else you can do in life. So I’m going to draw a hard line on this one. You might be tempted to stretch for a killer loft or a sweet bungalow, but if it pushes you over 35% of your monthly net income, forget about it. Yes, there are “special circumstances.” Maybe you want to live closer to work, which is more expensive but also means you don’t need a car. That can work. Maybe you want to live where you like to be when you’re not at work, by an ocean or park, for example. That’s okay, but you’ll probably need to cut back someplace else to afford it. At the other end of the spectrum, if you’re comfortable living in a fixer-upper that hardly dents your paycheck at all, you go right ahead. You’ll have spare cash for the fixing-up. You need the other 65% of your monthly budget for the other things in life: Essentials, like food and transportation; Endgame, a.k.a. savings for retirement; and, of course, Extras, like dining out and going to yoga. Spend more than 35% on housing and something else has to go. It might feel awesome to get an insane place that’s half your salary, but it’s not so awesome when you’re there eating Ramen with no electricity.
- Don’t expect homeownership to make you rich. Because I can almost guarantee that it won’t. Sure, you’ve been told that homeownership is a good investment over and over again. After all, it’s the American Dream, right? Wrong. One of the biggest sources of this misconception is inflation, a.k.a. the amount prices go up over the years (and the reason those $5 movie tickets from your childhood are now $15). If you bought a house in 1970 for $50,000 and it’s worth $300,000 today, you may think you made a killing, right? Actually, no. You’ve made nothing when adjusted for inflation; you’re basically breaking even on that $50,000 house. And in fact if you add in repairs, taxes and other home expenses, you are probably in the hole. Contrary to what you might think, home prices have essentially remained unchanged if adjusted for inflation (in fact, they’ve stayed flat since the turn of the twentieth century). And the idea that your home could get you stock-like returns is bananas. You’re better off investing in the stock market. Here’s some simple math to demonstrate what I mean: let’s say we both have $100,000. I go buy a house for $100,000, and you rent and put $100,000 in the stock market. Assuming that inflation and stock return rates are predictable, after twenty years, my home is worth about $80,000. Your stocks, on the other hand, are worth $165,000, adjusted for inflation. Yowza! Your home is a place to live, sure, but not a place to get rich.
- Treat your home like a business. Your home isn’t always where your heart is—but your home can be where your stress starts. If, first thing in the morning, you are thrust into chaos from the disaster that is your closet, to the pile of bills on your desk, to your dirty car and your disorganized purse—what do you think your day is going to be like? That’s no way to live, not to mention no way to treat the belongings you’ve spent your hard-earned dollars acquiring. So invest in yourself, and treat your home like a business. Keep your belongings organized and easy to get to (think: workout clothes in a bin by the door so you have no excuses to skip the gym and work clothes organized into pre-planned outfits so you can reach into your dark closet first thing in the morning and emerge looking perfectly polished). Use color-coded file folders to organize incoming mail and outgoing bills (I like a special red or neon folder to store “action” items that demand my immediate attention, like credit card bills and rent payments). Cut the clutter (and make a little extra money on the side) by selling extra items on Craigslist or eBay, or donating what isn’t sellable to a local charity.
It might sound like a lot, but by running a tight ship at home you’ll actually free up more time in the long run to enjoy the home you’ve so carefully made for yourself.