Our natural inclination to buy as much house as we are allowed is cruel. In many ways, it’s much like eating at an all you can eat buffet. The stupid part of our bodies, wherever it may be, convinces us that more is better. But it’s not. More can be hell. I’d actually argue that “more is better” has become the American Way. Oddly enough, I believe that more is better, just not the way you think.
What do you want more of? This is an essential question, especially for prospective homeowners. Prospective homeowners generally are thinking about housing when they set out to buy a house. That’s not as stupid as it sounds, but it’s stupid if that’s all they think about. Buying a house is a tremendously big deal. In many instances, it’s the single largest purchase you will make in your entire life. Yet, it’s rarely treated that way. It’s quite strange how we got here, but somewhere along the way, our homes became disproportionately important to us.
I don’t need to explain why our homes are such an emotional entity, but I will. Our homes are the catalysts of our memories. They keep our children safe, they host meals, parties, prom pictures, and goodbyes. In many ways, our lives wouldn’t be complete without a place to host our greatest memories. AHHHHHHH. Wake up. All of those things can happen anywhere, for a helluva lot less than you are currently spending. You will taint your ability to create lovely memories if you make a stupid housing decision. You can prevent this by thinking about the proper thing when making a house decision: your life.
Your life isn’t about shelter, couches, curtains, square footage, basements, three car garages, or corner lots. Your life is about everything other than your house. Food, vacations, education, family, entertainment, and a ton of other crap. You cannot afford to do any of these things or indulge any of your interests if your house payment is a disproportionate share of your household budget. Consider these benchmark numbers for housing
40% or more of household income towards housing- Your margin of error is very slim. You are clinically overhoused. You should seek an immediate solution to this problem, especially if you have a car payment, student loan debt, and/or other consumer debt. It’s nearly impossible to save for the future when this much money is going towards your house payment. It is very unlikely that you have a properly funded emergency fund (three months expenses).
26% to 39% of household income towards housing- You listened to the bank. Or you followed the advice of a mortgage calculator. You are spending too much on housing, but it’s not a fatal error. Again, if you lack a car payment and significant debt, then you will be fine. If you have a car payment or debt, then you are at risk of hating your financial life for a long time.
25% of household income towards housing- You precious creature. You’re a listener to Pete the Planner’s Ideal Budget, or you’re an otherwise intelligent person. Life is manageable, fruitful, and comfortable when you can limit your house payment to 25% of your income. You can get the best of both worlds: a nice home and a nice payment.
Less than 25% of household income towards housing- Do you want everything and are willing to sacrifice a stupid housing decision in order to get it? Awesome. Then spend less than 25% of your household income on a house payment (this includes rent payment too). Travel the world. Dine out. Drive a sweet ride. Collect wine. You can do these things when you don’t overcommit to ridiculous housing costs.
The choice is yours. You just need to make this option an option. If you identified yourself to be in one of the “problem” categories above, then do something about it. The problem won’t get better unless you do something proactive about it. And to further the quantification (yeah, I went there), if your mortgage or rent payment, combined with your transportation costs (payment, insurance, gas), is above 55% of your household income, then we’ve officially figured out why you’re hating life right now.
Show restraint when making a housing decision. You’ll actually be able to live
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.
14 thoughts on “People really screw up things when they buy too much home”
Should the 25% include utilities, or are utilities separate from the housing figure?
Perfect!! Just what I think! (Just what my fiancé and I try to explain his mom when she pressures us to go buy a home or “you’ll live under a bridge”).
I just realized our payment is 8.6 percent of gross. Do I win a prize?
Yes. Yes you do. I think you are probably living the prize.
Nope. Just payment.
Where can we find the % expenses you discuss in your radio commercial for all expenses not just the home?
Never mind. I found it at https://petetheplanner.com/site/ideal-budget/
This post really hit home for me. You see, I typically run (like physically run) through a very expensive housing edition near my house during the weekends. I’d often find myself thinking about what I needed to do to live in a house like those. I remember even thinking that one particular house seemed pretty reasonable/affordable only to take a look at the realtor sales ad and find out it was well over $600,000. Then, it finally dawned on me one day (with the help of one of your posts) that having a big house or fancy car would be nice, but it’s not the determining factor to my success.
While I still want those things at some point, I’m not willing to give up some of the other things I enjoy in my life…you know the things that keep me HAPPY or as you say, allow me to LIVE. I finally realize that this icon of happiness I created really doesn’t really symbolize happiness at all!
I’m more determined than ever to still have all of those things because, well, I like nice things. But now I know the RIGHT way to go about doing it. The way in which I can actually LIVE and enjoy it.
Keep on keepin on with this great info, Pete!
P.S. – Your post was very well written. One of my favs.
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Is this advice and the budget chart based on net or gross income?
Does the 25% of net also include insurance and taxes figured into the monthly mortgage?