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.