Earning More vs. Spending Less, Round 1: Housing
Published on - August 16th, 2012 (Modified on - August 22nd, 2012) (by El Nerdo) Spending less than you earn can be accomplished by earning more, spending less, or both. Yet most people in the personal finance world tend to support one strategy over the other with greater fervor. It’s not a logic thing: it’s a personality issue that may have to do with risk tolerance, optimism, entrepreneurship, class background, religious outlook, cultural practices, and other unknown factors.
Sometimes this can be situational. When work doesn’t deliver one might focus more on cost-cutting. When the economy grows, we might try to increase our profits and incur lifestyle inflation. Some personalities will do the reverse, however: look for opportunities in bad times, save for a rainy day in good times. We’re all different, and that’s a good thing.
Personal finance advice varies the same way. On one end you’re told you should be a “winner” and amass millions. On the other end you’re guilted into joining the frugal/minimalist movement so you can retire early, reduce your environmental footprint, and travel the tropics for a dollar a day.
I’m currently working on a series of articles where I’ll examine these opposing viewpoints as they apply to real-life situations (mine in the article, yours in the comments). This first installment is about housing.
Starting from balance
The Nerdez family spends 26% of their take-home pay in housing, including renter’s insurance and basic utilities. In total, we spend less than we earn. Our money (actually I should say “our cash flow”) is “in balance,” per the Balanced Money Formula: 50% covers our needs and contracts, 30% is for our wants (fun stuff, like restaurants or new clothes,) and 20% goes to savings and debt repayment. We have a small emergency fund, and we even have a little debt snowball that’s rolling at a manageable pace.
After years of severe austerity, this feels good and right and safe.
Three years ago we were forced to cut deep. We had been living beyond our means since leaving grad school. The recession nuked our biggest clients and our over-leveraged financial construct crashed as a result. We retreated to safe ground in a hurry while letters from creditors poured into our mailbox. We had to cut costs, find ways to earn again, or declare bankruptcy. With a shrinking economy and a negative cash flow, making more money became a tremendous challenge. And so we cut costs–with a meat cleaver.
We moved from a three-bedroom house to a one-bedroom apartment with no washer and dryer. We got rid of three bedrooms worth of “stuff,” including excess clothes, which we sold for cash. We traded a high-maintenance import car for an American truck. We spent on nothing that wasn’t vital for survival, and if we did then it was probably just twice, and it cost 50 cents.
Today we enjoy living below our means. It’s a huge source of serenity. Only there’s a problem with this model, and it has to do with our means: they are still very limited.
Living like students
Right now our balanced budget allows us to rent a one-bedroom apartment in a mixed-income neighborhood of a mid-sized city in the Southwest. It’s convenient, close to many services, walkable, and quite trendy to boot (for the town, anyway). In spite of all of these advantages, rent is very low. That’s because we live in an apartment that’s usually rented to students.
This is the cheapest rent we’ve ever paid as a couple, but the place is decent and well maintained. The landlords are friendly and responsible, not predatory slumlords, and in this we’re very lucky. Our immediate neighbors are nice people, mostly in grad school or recently graduated. However, this isn’t the best location for people over thirty.
The area is fun and lively, but it can get rowdy on a Friday night when the drunks walk home from the bars, singing and howling. On regular days the students aren’t the best at picking up after their dogs (they all have dogs for some reason) and I take the abandoned feces as a personal affront.
We also have a population of homeless drunks who have no qualms about accosting you at your doorstep to ask for a cigarette (I don’t have one), or tell you they need bus fare (it’s not true). One late night, some time ago, a mentally ill man had a lively party with his invisible friend in my front yard. They left commemorative cigarette butts and beer cans.
We’ve lived in bigger and louder and crazier cities, but we had better windows that kept the noise out, and our buildings had porters and security guards. Paying 60% of our income in rent was crazy, but it had some pluses…
Right now I’m thinking we could just stay in the area and rent in a better building. Something, you know, for grownups.
Ground-level Astronauts
Space. The final frontier. Not outer space, but figuring where to fit a kitchen table when there’s no more room (answer: nowhere). I’ve seen video footage of the space shuttle astronauts, and they lived in orbit almost as cramped as we do here on Earth.
My wife and I both work at home. Until recently she had a part-time job she hated, and she would spend two or three days a week there. She recently quit, so she’s here full-time now, with her plants and posters and trinkets. She likes a homey space, I like mine industrial-looking.
Both our living room and dining area function as offices and studios. We also rent a small storage space: not for clutter and “collectibles”, but for actual business gear. The storage makes our space more livable, but we still lack areas to relax and socialize. Having friends over can be difficult, but since we stopped spending money going out, we have little choice and we invite them over anyway–two at a time.
All along we have thought of our small-space living as practice for some day when we’ll be in New York, or Tokyo, or who knows where else, but we’ve been feeling cramped lately. Creatively, frugally, minimally, apartment-therapy cramped. Tiny houses can be a giant pain sometimes.
Is it really necessary?
We could find a studio or office space outside our home to free up our living room, and that would make things more flexible, but it would cost more money. And since ours is a “passion” line of work, we do it at all hours of day and night. When you’re up at 3am editing video, or writing, or painting, it helps to be near your own kitchen and bedroom, not in a deserted building under green fluorescent lights. Our situation simply calls for bigger housing. Or doesn’t it?
Next year we’re going to be in an artist residency (free housing and free studio space for a few months). After that is over we’d like to move to a more spacious and safer home. But we could also sublet our place so we come back to it, and continue saving money. Both options have their pros and cons.
Yes, people are poorer and more cramped in the third world, but we don’t live there, and we’re just two human beings with earthly desires. We can argue until we ‘re blue in the face about what is a “need”, but fortunately in our society no citizen’s committee can tell you that you have to be content with your housing allocation. It’s a free country. And right now, we’re feeling restless.
Our next goal: earn more
Should we focus more on earning so that we can move to a bigger place, or just be happy with what we have?
We would like to move, and we’ll work on earning more with this goal in mind until it happens or something changes our minds. Are we asking for “lifestyle inflation,” dear readers? Or are we being reasonable? Counter-cultural frugalistas will see us as hungry capitalist pigs, but more advanced capitalist pigs will laugh at the squalor of our daily life. No matter what you do, you can’t please everyone.
And so, to improve our lives while staying in balance, we will make more money and add to our savings before we move to our next place.
A future installment in this series will deal with the non-trivial challenge of increasing your income when you just can’t go back to being sixteen and making all the right decisions this time around.
And for you…
- What percentage of your income do you spend in housing? How much do you think is right?
- How does the space and layout of your home reflect your priorities? In what ways does it fail to do so?
- How have your priorities for your home changed over time? How have you dealt with those changes? Did you move, remodel, rent external space, etc.?
- How do you balance savings and debt repayment with other goals in your life?
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Unfortunately we spend a third of our combined income on housing. This is far more than we would ideally want, but London is expensive! Our home is modest but in a sense, minimalistic. We have good quality furniture that will last, yet not ridiculous. We currently are repaying our mortgage on a 2 bedroom house, (dining room, living room, kitchen, conservatory and garden) but it still cost about $300,000. Our no. 1 priority is paying off our mortgage quickly and beating amortization!
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For London that doesn’t sound modest, sounds quite nice!
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I should have added it is not central London, London area! You are right though – if it was central London it would be pretty luxurious!
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Central London student chipping in here! My rent is a whopping 70% of my income, not including bills, but I decided it was worth it. This location means I can walk to university so I save on transport costs and it’s also a safe area so I can jog in the evenings without feeling threatened. I also have good access to supermarkets, including discount ones like Lidl so I save money on those parts of life. I don’t have a living room though, and the upkeep on this flat is appalling for the price.
For the first term of my second year I lived at home with my parents to save money and commuted in. It was hell- early mornings, late night, hours standing up on a train, dirty looks from passengers for carrying a portfolio in rush hour, no time spent with friends, winter depression from standing around on cold dark train platforms. The train fares are constantly rising too! If I wanted to be at university before 10am (or needed to be for a lecture), it cost me £20 per day. Given that my weekly rent now is £150, I don’t think that’s too bad.
Plus if I get super super broke now to the point where I can’t afford hot water bills, I can just go use the showers they have at university for cyclists.
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I think what you’re going through is normal, so don’t beat yourself up about it.
We’re fortunate in that we’re retired and that magical word: comfortable. But we’ve always lived below our means and place a very high priority on saving/investing, for exactly this reason.
My thoughts would be: keep in mind the economic cycle. That’s what caught you out when your customers got nuked and took you down with them. It’s not rocket science, but it does affect your lives, even though it moves slowly and therefore isn’t on the news until it’s too late.
Therefore, I’d say make your decisions on getting more income and spending more after consideration of where we are in the economy.
I worked in a cyclical business, and staying in tune with the economic cycle became second nature to me. And it really paid off in the last recession – we came out of it in the best financial shape of our lives. (And that’s what prompted friends to tell me to do a blog about it.)
It sounds so ordinary and so boring to say keep up with the economy, but the difference it makes can be enormous.
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Like William, we are “comfortable” as hubby has retired while I happily work full time and we have no debt. Our percentage of income on housing is quite low without a mortgage as we only have to manage taxes, insurance, upkeep etc. We have a 1600 sq ft house though as we prioritize having separate spaces over other things. There is no right or wrong answer for how much space you and your wife choose….only what is important to the two of you. We could get by with less space but there are few options in our neighborhood of much larger homes. We love our neighborhood that allows us to walk to the grocery store, restaurants, pharmacy etc. Sure we (and you) could live with less space and is a less desirable neighborhood but it is about the quality of life too and not just maximizing savings.
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To move or not to move? I’m having this debate too — and largely for the same reasons. I live in an inexpensive building which has gained more and more students in recent years. (Which has introduced a lot of noise and other problems.) The place is falling apart, but the landlords only fix major issues. I haven’t moved because I like the reasonable rent and being able to save.
It was my starter apartment when I moved out of student housing and I kept telling myself I’d move when I earn more money. I earn a lot more money, but after each raise there was a voice in my head saying “avoid lifestyle inflation! avoid lifestyle inflation!” A nicer place will also be a more expensive place.
I don’t know where to draw the line, but I’m fast approaching it!
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Elizabeth, if you plan to trade up, the best time to do it is as close to the bottom of the market as you can get.
Reason is: the higher prices get, the wider the gap between the place you sell and the place you buy. I don’t know how prices are in your area, but from what I’ve seen, home prices in most markets are already well off their lows.
If that’s the case where you are, it might be worth your while to save like crazy and do the up-trade in the next recession. We’ve never had to wait more than 10 years between recessions, and the last bottom was 2009. It may happen earlier, but even worst case, you don’t have that long to wait. Good time to save like the clappers (as the say in the UK) and do the up-trade with a minimum of financial fuss.
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Oh, I totally agree with the timing — which is one of the reasons why I haven’t bought yet. I’m in Ontario and housing prices have kept on rising here. Experts keep telling us the market is going to slow. As much as I’m coming to hate my apartment, I don’t want to buy a place to see it lose 10-15% of its value in the next few years. I don’t see myself living in a condo forever, so it’s not like I’m able to buy and hold.
It’s certainly worth thinking about. For now, I can’t go wrong saving money
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Hi Elizabeth ~ suggest you check out Garth Turner’s blog: http://www.greaterfool.ca/
for the real story on Cdn real estate right now. Cheers!
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Thanks, Lexi! Great resource
I was just reading a post on asset deflation and why that’s a problem given that a fair amount of people’s wealth is in their homes.
It’s kind of scary.
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It’s always a trade between the devil you know and the one you don’t know with respect to any significant change. Yet we tolerate burdens placed upon us over time and seldom realize that we are so loaded down we can hardly breathe and we would have never entered into a situation if the total weight we currently carry were dumped upon us up front.
While there is no guarantee that things will be better where and when you move, you have to consider would you move into such a place if you were looking now? Would you tolerate the lack of maintenance, noise, etc.? If not, and you are meeting your other financial goals, start seriously looking or better yet have an end date in mind, x more months or years, and start planning for it.
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lol. No, I wouldn’t move into this place now nor would I recommend it to anyone who wasn’t a student. That’s pretty telling in itself, isn’t it?
I keep reminding myself that every building has its issues and this place isn’t bad compared to some of the places I’ve seen. Given the costs of moving, I wonder if its worth finding a better place to rent until I buy or just try to tough it out here until I buy.
One “must have” I have for my next place is that I can afford it while meeting all of my other financial goals.
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I’m not sure exactly how this was really tied to an argument of earning more versus spending less.
I actually liked the idea of living in student housing to save money. In fact, I lived in what was primarily student housing to save a whole lot on rent (probably $200 a month) for a 1 BR apartment about a year after graduating. The one downside: my landlord assumed I’d be leaving at the end of the school year and never asked about renewing the lease! We worked it out in the end, but something to consider if you go that route.
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I second this “I’m not sure exactly how this was really tied to an argument of earning more versus spending less.”
I am not sure what the point of this was…other than a shorter article (thank you) detailing more about your life that you haven’t told us yet (um…why all the info? )culminating in a questions that I believe were already covered extensively in an ask the reader question. And I am still failing to see what the content of the article has to do with earning more vs spending less.
I think you are actually trying to figure out how to spend “Enough” on housing in order to find the balance between the space you need for shelter and your indoor life activities and the money you have alloted to pay for it. This balance equation taking into account all the dynamics of life and its unexpected changes, as best as mathmatically possible of course. When you have that figured out – I am sure you will tell us all about it and perhaps get us thinking about what our personal ideal balance is. That is an article that I will look forward too!
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I agree that the content of the article doesn’t quite match the title, but I liked it anyway because I related to it so much. Downsizing your home is a suggestion we hear often, but nobody talks about what that actually feels like when put into practice.
I was in 480 square feet (with a poorly laid out floor plan) and now I’m moving and considering a place that’s even smaller, just to save as much as possible. Financially it will be great but, like El Nerdo, it doesn’t help me finding space for a dining room table.
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I think there is an unsaid question here:
Should we focus more on earning so that we can move to a bigger place or just be happy with what we have?
It is a good question as El Nerdo has passions that don’t, always, pay the bills (as stated in the article). The rest of the article is explaining the current struggle and the quandry. Problem is, the author never comes out and explicitly asks the question. He really should have.
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Fixed! Internet > Typesetting. Thanks!
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We are a three person household – me, my husband, and our three year old daughter.
After taxes we spend: 15% Housing – mortgage, utilities, taxes, insurance, & upkeep.
26% Cars – 2011 Pilot, 2004 Accord, 2009 Harley, insurance and upkeep
12% Daycare & Child costs (Dr’s, clothes, etc)
14% Savings
Everything we have will be paid off in less than five years, including the house, hopefully even less. Our plan is to fix it up to maintain it. Like the hole in the floor, fix the bathroom, new carpet, fix the roof before it starts leaking. Then we will be able to either sell it outright and buy another bigger house, or put another modular on our lot.
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You know, I haven’t sat down to figure the exact percentage of our housing. A very rough figure comes in at under 17%. It’d be much less if we were actually living in our home, but we’re renting at the moment.
We also downsized in the past few years, from a five bedroom/three bathroom house down to three bedrooms and two bathrooms. Really thought the big house was necessary, until we spent the better part of a year in an RV (and nearly six months in a one-bedroom apartment). That helped us to realize that we didn’t need a huge house. Right now we’re renting a two bedroom house. Sure, we could afford a bigger house, one with an extra bedroom so the kids wouldn’t have to share…but we’d be giving up a lot. We value travel and experiences more than an extra bedroom, a newer car, paytv, etc. So that’s where we spend our money.
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•What percentage of your income do you spend in housing? How much do you think is right?
Right now, our house payment is about 12% of our gross income. We have a 2300 square foot older home on about a half acre of land. When we purchased it sixteen years ago, it was a bit of a stretch, but our income increased over time, while our payment remained the same – the benefit of not always trading up to bigger, better, and newer.
•How does the space and layout of your home reflect your priorities? In what ways does it fail to do so?
While the kids were growing up, the space seemed just about right, and we liked the yard and garden areas of our home. People always commented on the parklike nature of our home and we had wonderful barbecues and gatherings for special events here. But now that we’re empty nesters, the house is twice as big as we need, and the maintenance takes far too much of our time. It will, however, be fully paid for by the time we retire, which is a big plus.
•How have your priorities for your home changed over time? How have you dealt with those changes? Did you move, remodel, rent external space, etc.?
Our first home was around 1100 square feet, with a small yard, no garage, and limited parking. We came to a point when we were simply running out of living space, so we hunted for, and found, our current home. We had rented external storage for a while, but there seemed to be a limit to how much it made sense to spend on that sort of thing, and whatever you store is not so easily accessible.
•How do you balance savings and debt repayment with other goals in your life?
We try to keep those things…balanced. Our budget is set so that we give away 10% to charitable causes, save 10% for retirement, and spend 10% on fun things. Our fixed expenses only run about 40%, so we no longer have to feel pinched to do any of that – and we’ve accelerated our mortgage repayments with “leftover” money.
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This article is very timely for me! I am renting a room in a condo right now and it is very affordable. My total bills (rent and utilities) are about 25% of my income and I’m able to save about 50% of my income. But I’ve been here for a year and a half, since graduating college, and I am DYING for my own apartment and my own space. It’s unfortunate that apartments are really expensive around here but I love it, and my 2 mile commute.
So I’m pretty sure by the end of the year I will bite the bullet and get my own place. And spend 50% on rent. But I’m ok with it because I believe that number will be temporary as my salary should increase and I will begin earning commissions by early next year.
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Hi Stacie, I’m trying not to reply to comments individually, but yours alarmed me a bit and I thought I’d post anyway.
While we definitely could use a better home over here, we’re not planning to increase the rent’s percentage of take-home pay. Rather we’re looking to put the time, energy and dedication to increase our income so that we can move without straining the budget.
Just yesterday Donna Freedman wrote “You should never count on a raise, i.e., spend as though you already had it.” Full article here: http://www.getrichslowly.org/blog/2012/08/15/the-power-of-personal-responsibility/
As someone who’s bee there, done that, and broke his teeth in the process, I’d strongly caution you against locking 50% of your pay into rent alone, even if you think it will be only temporary.
I’d suggest finding creative solutions to the challenges of your current situation, and once you get your raises and increased commissions start looking for a new place or a new roommate that lets you keep your expenses in balance. Make the desired home your motivation to work better! But get the money first.
I highly, highly recommend you read “All Your Worth” before you put a pen to your next lease. It will help you gauge your decision in a wider context. I’m serious when I say that book could save your life. Best wishes!
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Don’t worry, the decision will not be something I make lightly. But I will still probably make it because:
1. I have no other debt and basically no other bills. So this rent (and I included utilities in the percentage) will pretty much equal my 50% needs. I’m lowering my “wants” % now to make sure I can do it in the future
2. Since I’ve been saving more than half of my net pay thus far, I have a large cushion of savings
3. My boyfriend will be moving in with me at some point which will cut costs in half.
You are correct, of course, that I cannot count on future income. And I will continue to think about it and see if I can come up with a creative solution, but so far, my living situation has been fine (it’s not about needing to find a new roommate…more about never having had any space of my own in my entire life).
I will definitely check out the book you recommend.
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This sounds a lot like me. A few years ago I got my own place because I couldn’t hack living with roommates anymore. I’m in a similar situation, as I commented below, in that my rent represents a large chunk of my net pay, but I don’t have many other expenses. So I thought I’d be OK moving into my own place.
But I underestimated how much I’d been spending on wants, and didn’t curb my spending enough. I went into credit card debt and ended up using all of a year-end bonus, plus some savings, to pay it off. It stung but was worth it. It’s definitely a good move to assess what you’re spending on wants BEFORE you move, so you can scale back appropriately. For me, the lifestyle change has been worth the decrease in pocket money. Good luck!
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I spent about half my take-home on rent for a few years, and a few things made it possible:
1) no debt
2) no car
3) very short commute (you have that now!) that allowed walking or biking
It sounds like you’re probably no/low debt, if you’re saving so much cash. I think cutting other major expenses out makes the housing thing a lot less scary than otherwise.
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What percentage? Total mortgage and utilities is about 11% of my gross. Our real estate market didn’t bubble up here until after I bought this house and has stayed pretty stable since. Because I bought the house pre-foreclosure and bargained down in a special situation, it knocked about 25% off the price. Right now it’s valued at 75% over what I bought it at. But I don’t tend to look at where I live as a home as much as an investment. It’s just the way my brain works I guess.
The house and yard are way too big so I would like to down-size but my priority is getting my youngest kid through school in a stable environment. He won’t be finished for 6 more years and I’ll have to decide then what to do. If I could live anywhere, it wouldn’t be here but I don’t know where I’d like to live in what will probably be my last pre-nursing home place.
Re. balancing savings, I just spend whatever I spend which turns out to be about 1/3 of my net pay and save the rest. I don’t like having to think about money minutia – but that is what I had to do for many years to get here, so don’t knock it as a valuable exercise for young people starting out. Or older people trying to reach goals.
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There is a huge amount to be said for what you spend on housing when you work from home. I do part-time work from home and since I’ve moved into a new place, I haven’t been able to work in any way consistently. The space just doesn’t suit and the neighbours just that bit too noisy.
In this case the lower rent is actually costing more money than it saves.
In your case since both of you are working at home, having somewhere to chill out away from your work area is a must. Mentally it is very hard to differentiate between work time and play time if they are in the same chair.
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I’m in agreement with Stephen. I work from home full-time and my husband works from home part-time (commuting on the other days). We spend 15% of our income on housing which, considering we live in one of the most expensive cities in Canada, is unbeatable.
Unfortunately, we’re also tied to a particular area because of my husband’s ex-wife. Despite us having full custody, we need to be in the same school district for visitations and student activities.
We have four bedrooms (one for an office – totally necessary with teenagers running around the house) and a bedroom for each of us. Having kids share a room is possible ONLY when they’re little or same-sex; impossible with one teenage son and one teenager daughter.
Side note: according to this month’s stats for our area, a two-bedroom (condo or tiny townhouse) will run you an average of $360,000 and a detached three-bedroom will run you an average of $550,000. You can find so-so townhomes in the city for $400,000 – $450,000 (if you can deal with the high-traffic nature and poor schools). I always laugh when I see articles touting housing at $150,000 (I’m looking at you Trent). You couldn’t buy a tent in Toronto for that price.
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Right now my fiance and I spend 0% of our income on rent, because we’re staying with my mom as we relocate. We’re exploring our options right now: whether we want to stay here longer and save to buy a house in a year or two, or whether we value our independent space enough that we’re willing to pay for that and wait a few extra years for home ownership.
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We are now spending about 15%, to include mortgage, taxes, insurance and two extra monthly payments included for maintenance. When we first bought, we were spending around 26% of income. That was hard but managable, and I would use 25% as an upper limit recommendation for most people, with allowing yourself to accept something toward 30% only if you are highly confident (not wistfully dreaming) that your income will be climbing over the next couple years. Otherwise you’re likely going to have to make major cuts in other areas.
There are few pieces of furniture in our home that we have purchased new. Couches, chairs, tables, dinning room set, entertainment centers, etc. have all been picked up either cheap or free from friends and acquantances and their family who are moving, remodeling, etc. and looking for someone to help them haul something they were going to just donate or trash anyway.
This has lead to rooms that aren’t perfectly matched and would never win any awards for interior decorating, though there are no glaring standouts. But I had friends while growing up whose parents had perfect rooms in their homes only entered during special occasions, and on those occasions the parents would be sweating bullets someone would drop a wine glass on the carpet or have a plate scratch a coffee table. I didn’t want that for my home.
I also grew up living in cramped conditions. I swore that would not be me. It isn’t. Now, however with kids in college the house seems too big most days, and I’m likely to be downsizing in the future. To me it makes sense, I bought up because the family grew. I’ll buy down because we are shrinking.
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My wife and I are in our late 20s and have tried to live as modestly as possible. We have a 3 bedroom 2 bath home, 1,400 sq ft with 2 kids.
I think people severely underestimate what it truly “cost” to own a home. You have to define the cost very specifically. Are we talking just your mortgage principal & interest payment, or does your mortgage payment include property taxes, insurance, mortgage insurance, HOA? How about the actual cost of owning the home? Does that include lawn care, heating/cooling, electric, water, home improvement items you wouldn’t have by renting, home supplies, cable/TV/internet/phone? I think the majority of people do not calculate all of these in their total monthly housing “cost.” For us, if I bucket ALL of those items into a housing “cost,” it comes down to about 48% of our monthly NET income. Obviously the income side is another topic, are we talking GROSS or NET income after taxes? All things to be considered.
That said, I don’t see how anyone can own a home and be paying less than 40% of their net income to actually operate the home, unless you are just in a very good financial position.
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If you include all of that you listed for us, we come in at 29.5% of our gross/net (half of our gross isn’t taxed, since it’s a gift from in-laws, that’s another story). And that income total is less than $50k, sometimes much less, depending on what DH brings in from a side job.
However, we try to keep bills down, we don’t have an HOA, we have cheap internet only, etc. I didn’t include cell phones here (apartment living would include those as well), and we don’t have a landline.
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I’m glad someone pointed that out! I currently rent so I know exactly what my “all in” costs are.
But try to get people to give you honest answers about the “all in” cost of owning? I’m not even sure that’s possible. When people say “it’s 15% or 20% of my income” what does that mean? Does that include utilities? Repairs? The larger emergency fund you’ll need? In many cases, it’s just the mortgage payment people are referring to.
I have noticed that some people don’t count home improvements because they argue it increases the value of their home. I think you can only use that argument if you’re flipping a house!
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You’d pay for many of these expenses whether you own the home or are renting so they can’t be fairly attributed to solely the cost of owning a home.
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I estimated 17% of net income (and that’s accurate), but I didn’t include cable/internet/phone, or gardening (my hobby, but not needed to run the home), or repairs (which I should’ve done, and which would bump it by a couple percentage points).
I also didn’t include cosmetic renovation, which I typically count as a ‘fun’ or hobby spending.
So, our total expenses on 2 houses would be more like 20% of net income if ‘fixes and internet/cell’) were added.
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I pay approx 20% towards owning a house (taxes, insurance, mortgage + 1% of value for estimated maintenance and repairs). I don’t count utilities or cable/ internet as those aren’t expenses specific to homeownership in my area.
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We own our home in the US outright, so we have property taxes ($110/yr on the nose) and insurance (too lazy to dig out a bill…$300-$500 a year I think?). When we’re not there, we pay about $125 every four weeks in the summer to have the lawn mowed (it’s mowed biweekly, $50 every two weeks and another $25 for weed-eating every four weeks), and under $60/mo for electric (I have the a/c set very high, and the heat set very low).
Where we’re renting, $250/wk is probably about average. We’re paying $170/wk. It’s a unit set behind someone else’s house, and it’s not insulated the best. I guess you could add $10/wk or so to the rent price to make up for the loss of energy efficiency. Still coming out way ahead financially.
When I came up with my 17% figure, I was only looking at the current rent, and NOT upkeep on our other house. And I was looking at net income (took what we paid in rent for two weeks divided by what we were paid into our cheque account for two weeks).
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We pay way less than 20% of net, even including HOA, utils and maintenance. We could afford a bigger house, but we don’t have kids and don’t want or need more space (1750 sq ft; 3br/2.5ba). On the other hand, we live in Scottsdale, AZ…and one day we’d like to look into buying a second place in the mountains to escape the summer heat.
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Seems you are mixing living costs (e.g. all bills to maintain a household) with housing costs.
Rents often don’t include any utilities. Sometimes just water, or just water or gas but not electric. I’ve never seen a rent include a phone line, and cable being available is all I’ve ever seen, never part of the rent itself.
I believe most people say their rent is the amount they pay the landlord monthly, with or without extras. Similarly there mortgage is the amount they pay the mortgage company monthly, with or without taxes and insurance.
That is what you are typically paying for the roof over your head now, today, and isn’t all that wrong as a rough value when considering the general question of what percentage of your income are you currently spending on housing. Folks just have to recognize this is a general comparison.
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We spend 24% of our income on housing including taxes and basic utilities. We own our home and only have 3 1/2 years left to pay on it. We made a very large down payment so that if an emergency were ever to arise we could cope and not lose our home.
We downsized to a smaller home because we will only have 1 child home with us in the next 5 years, (we have 5, with 1 already on their own, and 1 half and half). We did have 1 child move back in after venturing out on his own, but he will be going to school soon, so it’s temporary. We moved to the country and have a lot more options and less expense than living “in town”, and we have moved to a much more desirable area. Our move was basically out of need and forethought, with a dash of opportunity.
We did have to get rid of a lot of things and give more attention to storage because we do still have 3 children at home, but we gained a bathroom, and I always thought I would hate 2 bathrooms to clean, but I find it very…awesome!
We do consider our home to be our retirement home, and don’t plan to move anytime soon. I think we’ll just enjoy our paid off home for a while. My “dash of opportunity” was because the previous homeowners had to get out from under the home and we could have sold it for way more than we paid the next day if we wanted to, so considering the housing market at the time of purchase, (2011), we’re good!
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Great post! Love the transformation of persoective this couple went through in order for them to see the big picture versus the immediate gratification we can all look for at times in our lives.
Live Beyond Awesome.
Jen
Twitter: @TheJenMcDonough
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Thank you for a timely article. We are currently planning on selling our existing home within the next year and moving from a fairly rural suburb closer to a larger urban area. We will be empty nesters and are looking to downsize our living space while pursuing a lifestyle that allows us to have shorter commutes,a smaller carbon footprint and more amenities within walking distance.
Due to the housing market in the area we don’t anticipate that our housing costs will be reduced by moving to a smaller home – our research shows that they will stay about the same. But we anticipate savings in gas and utilities by changing location and moving to a smaller home. We also look forward to spending less time on yard work and maintenance.
We would probably come out slightly ahead financially if we stayed put – but at this point in our lives we prefer to make a choice that increases our quality of life. It’s not always about the money and as you note in your post, there is a balance to be struck between being frugal and sacrificing your life to frugality.
Best of luck in finding a living situation that works for you and your family.
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We currently spend about 18% of our income on a 3700 sq ft home we built ourselves. Looking back, we’d probably cut about 1000 sq ft off. At the time, I was planning on having an in-home photography studio as my primary income. It didn’t pan out, but it’s a very nice guest bedroom. I think our main problem is that we don’t have a specified account for savings so we can see it grow. We just have a joint acct that everything goes into and comes out of.
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Our minimum house payment is about 20% of our net take home pay. We are prepaying it aggressively though and it should be paid off in about 3 years! Buying a house that is well below our means certainly made life easier.
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This may be a dumb question: are you guys using gross or net income when determining what % your housing expenses are?
I would assume you’re using net but I think back when I was getting a mortgage they were using gross income in their ratios.
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Ditto. If I look at housing as a % of our gross income, we’re at less than 20%. But if you look at it from net income, it’s quite a bit higher.
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The financial institutions look at gross. Someone explained it to me once, but I think it’s the only stable number financial institutions can use because your net income varies based on your tax deductions.
As I’m shopping for homes and mortgages, I’m looking at % of net. I want to know what’s going on in budget.
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Hi Jeff,
Not a dumb question at all! I’m applying the Balanced Money Formula, which uses net income to break down in percentages.
This is probably different than what mortgages companies do, but basing everything on my take-home pay makes more sense to me.
Thanks for your question!
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Thank you to both Elizabeth and El Nerdo. Both answers make good cases for using gross or net – that’s why I was confused!
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This is a really interesting article, as it is a situation people frequently find themselves in…wondering how much space they really need, and how much the location matters? I think space can be worked around, but location can be a deal-breaker.
In response to your questions:
I pay about 34% of my income to housing, which has always seemed pretty reasonable to me. About 50% of my income goes to paying off a consolidation loan I co-signed and into Retirement and Savings accounts; I’m focused pretty heavily on getting rid of the debt and building my savings at the moment, and most of the things I do for fun are very inexpensive, so this works for me.
I went looking for an older, but well maintained building with a high proportion of older residents and families – I didn’t enjoy living around students when I was one, so it was something I wanted to avoid. The building is about 70 years old, which is part of what keeps the rent at a reasonable level! As part of keeping my overall costs down, I made sure it was on a bus route that took me directly to work, and within walking distance of a grocery store, drug store, and post office. (Again, an area designed with retirees in mind/area with a lot of retired people is a great place to look, if you aren’t big on loud parties yourself.)
My apartment is always in a state of flux, use-wise: I chose a 2 bedroom as I suspected my mother’s retirement funds were running out, so I would have a place for her to stay, and used it as a guest room and office and craft room till she moved in last year.
When she moved in, I re-organized my room and the living room, and found a good sized air mattress to serve as a place for my nieces and nephews to sleep when they visit.
It’s looking increasingly likely that within the next year or two my brother-in-law will hit rock bottom financially, at which point he, my sister, and their three kids will need to move in with me temporarily. That means we’re looking at how we can use the space differently to house seven people instead of two. My sister and I have done the calculations including only income from my job and hers, and it will take us about a year to get their savings up enough for them to move back out, so we only need a short term solution. It will be crowded, but we can manage it; sometimes all it takes is some severe re-organization.
Can you use the furniture you have differently? Can you sell two items of furniture and get a single item that would serve both purposes? Things like that can make a difference.
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Lily,
You are an amazing sister to plan on taking in your sister and her family. But if your BIL’s financial rock bottom is a year or two away, why in the world can’t they make changes today to avoid that situation?
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Denial, unfortunately. He insists it will all work out.
My sister’s got all the expenses she can control down to rock bottom, and separate bank accounts now, and she’s begged, reasoned, and printed out hard numbers for him: he still spends more than he makes every month. She doesn’t want to divorce him, and no one can afford another rescue, so we’re letting him crash and burn and hoping it will serve as a wake up call.
He’s a nice enough man otherwise, just really good at fooling himself.
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In my town there are rules of how many people who are not related to one another can live in the same house/apartment (I don’t know what they consider extended family members). Also when I lived in an apartment, everyone who lived there had to be on the lease. Your landlord, if you are the only one on the lease, may not allow 6 additional people to live there.
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Holy crap. And I thought WE had a bit of a challenge on our hands! If this comes to pass, I would love a guest from you about how you manage to make this work. It would be inspiring and perhaps remind me not to whine so much.
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In my area, apartments only allow 2 people in an apartment per bedroom. They won’t allow 6 new people in your home. You could try to just sneak them in, but if your neighbors notice (and they will, from the noise increase alone from 3 kids) they can report you to the landlord and you’d be evicted.
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Well, gee, if you count utilities, where do you stop, exactly? If I count “internet” as a utility and therefore part of my housing, should I count my cell phone too? If I live in an apartment that’s cheap in part because it has no laundry, should I include what I spend at the laundromat?
Ok, so if you count all those things, we spend up to 30% of our gross income on housing, depending on the heating bill. If you count only rent, it’s 25%.
We’re grad students in it for the long haul (phds), so “cheap apartment” was not optional. We’re not in the absolute cheapest place we could be, since we have a one bedroom with extra rooms for a dining room and a study, but having no laundry, dishwasher, and a stand shower keeps it affordable. I think we could actually live someplace smaller, but we’d need basement storage, which we have none of, and we’re near the bottom of the price range already so the potential savings don’t seem worth the effort of moving…this year, anyway.
Right now I fantasize about how when we make more money we can easily upgrade to a place with maybe some outdoor or porch space for my plants, a little storage space, even an in-house washing machine…the nice thing about it is that it doesn’t feel permanent so I can see the little annoyances as things to aspire to leaving.
It sounds like you two were feeling that way for a while, and now you’re like, “ok, this wasn’t supposed to last forever, when is the end?” I think it sounds like spending a little more on housing to have more space to work would make a huge difference in your sense of well-being. You don’t have to buy a house, but a slightly larger one bedroom, or a small two bedroom you could use as office space, might be a big deal. Shop around!
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I have to say I really like the idea of counting utilities in a monthly housing cost because sometimes they’re included in rent and sometimes they’re not. I never thought of including utilities before, but now that I see it, I think it’s a good idea.
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Me too. My rent currently includes most utilities so I would definitely include utilities moving forward (er… no pun intended)
I don’t count internet or phone as house-related utilities per se. I don’t anticipate having to pay more for them when I move. (A bigger place costs more to heat, but having more space isn’t likely to affect my internet plan.)
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Not only that – it is much more expensive to heat and cool a large home than a small one. I wouldn’t count internet – but things required to ‘keep the home’ (ie: heat in winter or the pipes will freeze) counts for me.
That said I suspect we’re somewhere in the 35% range for take home. Our combined/ but not combined finances make it a bit murky to figure out the numbers that my husband pays, but I have a ballpark.
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Firstly, I think the earn more versus spend less debate is dumb. BOTH, if at all possible. BOTH!!
20% of my income goes to housing. (Spouse has not worked in a decade, so this % could potentially be 10-15% if he were employed). There is no right answer – we started out at a MUCH higher percentage and living in a high cost area we saw people do okay with 50%+. On the other end of the spectrum, we hope to be mortgage-free eventually and get this down to under 5% (for property taxes and insurance). You can make almost anything work, but if you are doing 50%+ you are going to need a really big income, and will have less tolerance for bumps in the road.
This is also just an example of where some outside-the-box thinking goes a long way. Our first home was a small condo that cost about 42% of our income. We ended up getting very frustrated by our options and moving to another city. WE also ended up buying new construction and semi customizing our home because while looking at options we noted this was the most *cost effective way to go* at that time and place.
How does space and layout reflect priorities? Though our home is currently costs just 20% of *my* income we have a luxurious 5-bedroom home. My spouse quit working and we had kids right after we moved here. Going new with a home meant we would likely have no move-in costs, home repairs or renovations, at least the first decade or so. Which allowed my spouse to stay home while most our friends spent their weekends at Home Depot. We went for energy efficiency which saves us ongoing monthly costs. Coming from the first or second most expensive city in the entire U.S., we have little requirement for space. We surprisingly enjoyed condo living. BUT, we are also introverts who prefer lots of private space. I really do think we are happier having a much bigger house, with kids. When our two kids are grown, I think our housing preference will go down by half. WE all are infinitely happier with at least our own private rooms. Considering where we come from and how frugal we are, people are usually surprised we do live in such a large home.
One thing we really coveted was a yard because we never thought we could afford one. We are so over it!! (& we only have about 1/10 of an acre!) Our plan is to downsize once the kids are grown. Preferably a nice condo with a view. A smaller, one-level, low-maintenance home sounds nice for retirement years.
Other ways to keep housing costs down: We put down a large down payment (when my spouse was working) and have always kept enough equity to refinance at will. This means being able to take advantage of lower interest rates over time. You can have your cake and eat it too, for sure. Once you save a little and are ahead of the curve, and with a little creative thinking, I have always found it easy to balance savings and other life goals. In fact, the more we save the more goals we are able to achieve. Win-win.
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“Firstly, I think the earn more versus spend less debate is dumb. BOTH, if at all possible. BOTH!!”
I don’t agree.
We could make more money in a number of ways. Wife could work full-time instead of part-time. I could, um, get a paying job (of which a significant portion would go toward paying for childcare). We could move back to the US (make more money AND not pay for housing, woohoo!).
At this point in our lives, we’re definitely in the “spend less” group. And “earn more” would mean more time spent away from our kids, not getting to travel the world (sounds counter-intuitive…but if you’re always earning more at all costs, you don’t have time to really live).
Of course, I don’t think that everyone should adopt our philosophy. Just saying that it’s not necessarily dumb to pick just one instead of both.
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We spend 15% of our income on housing. I actually spend more on childcare than I do on housing which is likely why we have to skimp on housing. We rent a 3 bedroom/1 bath at a very reasonable for the area rate in a Boston suburb. Can we hear our upstairs neighbors walking around and sometimes arguing? Yes! Does is suck having a family of 4 share one small bathroom – oh very much yes! But the neighborhood is nice, the school district good, and our landlord is very reasonable and attentive. We are slowly saving up for a down payment to buy our own place so in the end it is not a bad place too be as we do this.
I think it is more than reasonable to get a bigger place for you both. Most people do not work/live in the same space and since you do, you need more space or you might start getting on each other’s nerves more – think of it as an investment in your marriage and business! Surely there is a larger place for the same money in your city or suburb of your city?
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Meredith, Growing up we were a family of 4 with one bath. You can make it work.
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We have 3 full-time and 2 part-time household members, plus constant teenage visitors and sleepover guests. Having only one bathroom can be an inconvenience at times, but it’s completely do-able. On the plus side, only one bathroom to clean.
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If they’re living in a housing area that is generally rented to students, then there may or may not be larger places available for rent at about the same price within their city.
If they are near a college campus, then the rent near the campus may be a bit higher due to demand. Or it could be lower near the campus because normal tenants aren’t interested in living there. Or because there may be lots of other places to choose from so the landlords compete with each other by slashing prices.
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Our total house payment including utilities and the guys who mow our lawn is a little less than 10% of our monthly net income. We bought at the bottom of housing in Feb of ’97. The house was originally small but we did a large addition which makes our home perfect for our needs and nearly all of our wants.
Every once in a while we’ll drop one of our kids off at a lovely home in a more upscale neighborhood and we’ll think, “Oh maybe we should trade up,” but then we think about how easy our monthly payment is for us and we snap out of it.
We still owe about 100k on our home and will have it paid off in about 10 years if we don’t pay ahead on our mortgage. We’re no longer trying to pay the house off quickly as the amount we pay on the mortgage is about equal to all our other housing expenses (when you add utilities and lawn mowing service onto the taxes and insurance). And our feeling at this point is we’d have to pay to live somewhere and this is pretty cheap.
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El Nerdo, I think you could use more space now Mrs Nerdo is also working from home.Is there a way you could keep your housing cost the same while getting something bigger by trading off on something you don’t care about? When I looked for a rental I needed to be in a “happening” neighbourhood with a short commute… but I was willing to live without air con and heating (temperatures range from freezing through to 110 here but I’m used to it) in an older house with a charming retro kitchen and bathroom in a semi-industrial area (hello noise from nearby pub!).
My rent is 17.5% of my after-tax income. (I have a housemate, who pays half, without her it would be 35%). But I have zero transport costs (and all the health benefits of walking to work.) So it’s ok. We have a spare room for hobbies and a nice yard. Relative to my income my rent is low… 35% of income is common for younger people (even with roommates)… it’s an expensive city. So I’m thankful for my lower than average rent and reasonable salary and I love this house and neighborhood.
Good luck finding a housing solution that works without sacrificing your budget too much.
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It sounds like you need to move! I’m not sure why you’re agonizing over it so much. Try to earn more during the next few months and if you’re successful, move. It sounds like there’s no way to cut back in other areas to make more room in your rent budget.
I think housing is important, and we spend a lot on our “luxury” apartment. (BTW we are surrounded by virtually all grad students and have never had a problem with noise or litter. Whatsoever. Are you sure you aren’t living with undergrads?) We are currently spending 26% of our net on rent alone (31% if you include utilities), and that has been a bit steep for us so we are moving and shaving over $100/month off our rent for a townhouse in a better location and with equivalent square footage/building quality. I don’t mind spending a lot on rent because that’s WHERE YOU LIVE (and in your case WORK)! You spend so much time there, it should be functional and you should like it.
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Nerdo, I don’t care to answer the inquiries above as my situation is neither here nor there. I’m the contrarian type of personality you cite.
26% is a lot—but there are no little Nerdos at the moment– so in the realm of okay. 26% isn’t nuts– but I’m just sayin’…an upper limit for the sane and you are definitely a member of the walking sane that requires no anonymous poster’s opinion as anything more than token counsel. That said, IMHO—ya need to make more money before any move upward is even spoke of. You obviously adore your wife, you are safe, you get to transition to an artsy *free* sitch soon, though temporary. And…you have a hidden cabin in your back pocket if need be. Make more, move slow and be thoughtful in every decision you make. But you know that. Oh, and yeah. I loved your post. You did dumb it down, wanted to make sure you knew that you were successful at pleasing most.
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To me it sounds like you need a 2 bed apartment. If you had a shared office you’d have a dedicated space for your work and feel more free to have friends over. Also, the increased cost of the second bedroom will likely be less than renting separate studio space.
Are there 2 beds in the same building? You could have your landlord keep an eye out for you while you’re doing your residency.
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Right now, we are aggressively paying down our mortgage so all in (including the extra principal payments, property taxes and assessments) our home cost is about 35% of our net pay. When my husband and I purchased our 1100 square foot 2br/1 bath condo in Chicago, the bank said we qualified for much more. This was back in 2005 when mortgages were handed out with the lollipops at the bank. We ignored the bank and went with what we thought we could comfortably afford on one salary and I am so glad we did. Our salaries have increased over the years and now our mortgage payments feel minimal.
I do wish we had another bathroom and I was adamant about having a dining room but we rarely use it. It comes in handy for parties but we could have made do without one even when people are over.
My husband is a musician so the second bedroom is his studio but he also has a practice space. Right now, it is just the two of us but if we do have a child, I’m sure the layout of our place will feel stifling. The studio will probably move to the dining room.
If you came over and looked around our place, you would think our priorities are music, beer and our cat. You would be right.
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What percentage of your income do you spend in housing?
19%
How much do you think is right?
25%
How does the space and layout of your home reflect your priorities?
Right now we live in the ghetto in a 750 sq ft duplex. We have 2 toddlers and it feels tight but doable. We are only here for a year to save money.
In what ways does it fail to do so?
We had to get a security system do to high crime rates which was a large investment plus monthly bill.
How have your priorities for your home changed over time?
I feel a huge desire to be debt free.
How have you dealt with those changes?
Moved somewhere with half the rent.
Did you move, remodel, rent external space, etc.?
We got rid of over half our stuff.
How do you balance savings and debt repayment with other goals in your life?
One thing at a time. Debt and savings is priority 1.
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From a non finacial (necessarily) perspective, I fell your pain. I’m an empty nest widow with a 2300 foot house who will be downsizing as son as some structural improvements will be made to increase selling ability.
That said, Im a quilter and an art student and I also work at home doing a couple things. so one bedroom of four is a quilting studio, one holds all the things I sell on amazon, one is mine and one is a guest room-oh, and the office where I deal with people is in the formal living room.
Im looking forward to downsizing but it will ahve to be creative to say the least, lol.
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I can totally understand where you are coming from. I’ve had the debate on whether I should move to a much cheaper yet unsafe/undesirable location, or live with a roommate even though i’m 41, and come with a cat and an apt full of furniture. My percentage is aprox 32. Rent is my biggest expensive, and as a freelancer, my income has been sketchy, in face I just took on a part time job to make some extra money. I’m looking for full time work in my field daily, but it’s been a struggle. So I continue to have the debate…
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Reading these comments makes me a little depressed to be honest. I’m shocked (and totally envious!) at how many people spend less than 20% on housing. I spend 35% of my net pay on mortgage+interest+insurance. If I included major utilities it’s more like 45%, and my house is in the low end for my city. I think part of the difference is I live by myself, so I don’t have that second income to help cover costs. But I feel like will never get to that “under 50% for needs” goals
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I’m right there with you.
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Me three! My apartment would be ideal for a couple. If I had a boyfriend/husband, my costs would be just over half of what I’m paying now. (Utilities are included in my rent, but parking and laundry would be extra for an extra person.)
It’s disheartening condo shopping alongside couples who can afford much nicer places (or renovations) by virtue of having a second income. I don’t begrudge anyone their happiness — I just deal with a different financial situation.
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Could you live with a friend? I live in 3×1 house with yard which I share with my best friend and we each pay a lot less than it would cost to rent a one bedroom apartment. (You could sub-let a room in the condo when you buy it also). Yeah, I totally get you on the condo shopping… my dream house on my favourite street is for sale at the moment. Could borrow 2/3rds of the amount needed to buy it without dramas…If only I had a second income, it would be easily affordable
Even renting out a room in it wouldn’t get me over the line sadly…So I keep on saving for my deposit for something on a less desirable street that is less renovated 
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@Angie — I used to live with friends, but they have a habit of getting married and having kids
(Yeah, I’m getting old!)
The terms of my lease won’t let me sublet a room, but I am debating buying a condo big enough to rent a room. Still, I have to plan for the income I have now — not what it might be.
We’ll see what happens
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me too – your percentages are about the same as mine. i live within commuting distance of NYC so the prices are crazy, and i am single so no second income helping me out.
but that’s where my job is. i have a good job that i mostly like and that pays pretty well. i don’t want to move any further away (i currently drive 26 miles each way) because i don’t want to spend more time commuting, and i don’t want to put any more miles on my car (it’s 8 years old with 162k miles on it, and fully paid for – i plan to drive it into the ground, but i certainly don’t want to accelerate that timeframe).
i think i can do about $150-200 less per month and still live in a reasonable area, which i plan to do when my lease is up in november. but anyplace even cheaper than that gets into the realm of gross and unsafe, and those aren’t areas in which i am willing to compromise.
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I wonder if part of the reason for the lower percentages is the amount of time some of us have spent in the home? If you own your home, the mortgage part will remain stable, even as prices and your salary go up. And for those of us who bought in the 90′s, not only were we paying down our mortgage all these years, our interest rate is 3 or 4 percentage points lower than it was 15 years ago.
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In my mind, this is the main reason owning a home for the long term can work in your favor. Rent will go up, but your mortgage will stay the same. Of course, taxes could go up, but I think the likelihood of rent going up is higher.
But you have to buy a house that you know you can be in the for the duration. Many people are not in that position.
Mom of five, it sounds like you and I have similar house trajectories, but you are farther along on the journey. We are 90% done with our addition on our starter home. Now our house will be big enough for us to stay in forever if we want.
May I ask if you wrapped your addition into the main mortgage, or if you opted to get a HELOC? We chose to finance half as a HELOC and pay the rest in cash. If all goes as planned and we pay off the HELOC in a few years, we will only have the mortgage of our original, smaller home. Yet we will live in a house that is 30% larger and with a second bathroom.
It will be about 15% of our take home pay.
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Our mortgage has stayed the same but taxes, utilities, repair costs, and necessary remodels only go up.
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I think the percent of income thing is so variable based on (1) location (nearly everywhere in the U.S. is more expensive than where we are, but nearly everywhere is also more desirable to live); (2) when you bought; (3) how long you’ve been in the house (we were spending a higher portion of our income on housing when we first bought, but income climbed, and we refinanced twice, and bought our second house when rates were very low.)
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I think you’re on to something there, Mom of Five! I have a friend who bought a condo five years ago. Her salary has gone up and she just renewed for a much lower interest rate on her mortgage. Those two factors alone have reduced some of the costs of housing.
Then again, condo fees, property taxes and utilities costs are up – so it all depends on what you include in the equation.
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I feel ya too. My rent and utilities (not including internet) equal 33% of my net income. However, my boyfriend will be moving in with me for the next 5-ish months so that will help (he spends the other 7-ish months away for work).
I would love to pay less, but I think I’m actually getting a pretty good deal since my apartment is new-ish (they just painted the exterior and have done other updates), my neighborhood is very walkable, my one-bedroom apartment feels huge to me (600 sq ft, which is bigger than the apartment I had when I lived in Minnesota!), and I’m not too far from work (about a 30 minute drive). All and all, I consider it a pretty good situation since I’m living in the LA area and hope to stay in my apartment even if/when my income increases.
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Not everyone is mentioning their location. I spend 18% on a rural OK home on 5 acres. The same 3700 sq foot, $220k home in a bigger city could be worth up to a million dollars. However, we spend $1000 a month on fuel to drive 40 min to work (40-50 miles one way). We love our home and small schools and are willing to drive a long distance to work. It’s all relative.
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3700 sq foot? Wow! Admittedly, I live in Europe, but you’d be hard pressed to find a home that size under the equivalent of 2 million dollar here, even in rural areas. I payed upward of $180k for my one bedroom 500 sq foot apartment. And that’s netiher central nor new (and nearly 3 times my annual salary).
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We seem to be older than everyone that’s posted; mid 50′s.
After my husband was let go, we had to figure out how to survive on 10% of what he made previously. We had a few investments, unemployment and some savings. We knew the day was coming for the firing/retirememt, so we tried to prepare as best we could. The problem with that is life does not turn out the way you plan; it just doesn’t, no matter how you want it to. You have to constantly readjust.
We now live in a 624 sq. ft. home, paid off,with a car payment and health insurance payments as the only two real monthly ‘must pays’. My husband is now making 20% of what he was before the firing/retirement, and i’m still trying to find a job.
No matter what you choose to do about your situation, you have to have a sense of humor and more money in savings then you think you will ever need! And, community is so important! Get to know your neighbors no matter where you land!
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Now, as to the money, I’ve always spent mch more than the recommended amount of housing-at least the house payment part. But, I lived in Washington DC for 20 years and then in Germany-and other things averaged out. Even with driving teenagers we got along with one car and bikes in DC, for example. It does sound like you are doing the right hting for now. That said, I do believe that everyone should have their own place (be it in thehouse, on the patio, or under the bunk bed) where they can go, do their own thing, be alone or whatever. Hopefully you can carve that out even in your small space.
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I live in an expensive area but have very few expenses other than housing. My rent and utilities equal about 35% of my gross income, which would set off alarm bells for a lot of people. But I have no debt, no kids, and no car (I live in a part of the country where you don’t need one).
If I wanted to spend less of my income on housing, I’d either need to earn more, move to a studio apartment, or start living with roommates again, which I really don’t want to do. So right now, I just focus on keeping my other expenses down and saving as much as I can.
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What percentage of your income do you spend in housing? -We pay about 20% of our income on housing (mortgage, property tax, insurance).
How much do you think is right? Depends on the person, but it’s not good to be “house poor”.
How does the space and layout of your home reflect your priorities? In what ways does it fail to do so? Bought a fixer upper so for past 12? years we’ve been focusing on basic structural upgrades and repairs. We bought a cheaper place, and “paid as we went” for repairs as we could afford them. We are now at the point major stuff is done, and (finally) can focus on things like decor and layout. Layout and furnishings, much of it is a “fail” (place is too cluttered (husband is a collector of things), my “office” for doing artwork is a box, kids toys spilling out everywhere like Mt. Vesuvius). I hope that much of this can be corrected, not by moving or expanding space, but decluttering, reorganizing, and gaining better storage.
How have priorities for your home changed over time? I want more space because have 2 kids, and possibly for a parent to move in at some point.
How do you balance savings and debt repayment with other goals in your life?
Any debt we’ve had (car, window replacement, heating/air replacement) we’ve had a goal to pay off within 2 years, and we’ve been able to do so. That usually meant putting off any other new major purchases until debt was paid off.
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Sometimes you simply must choose happiness over financial gain. After all, what is money for beyond providing for the basic necessities except to give us the opportunity to live our dreams? I always say that I work to fund my personal life! I would just make sure that the move to a bigger place in a better neighborhood will really bring you the happiness that you desire. Sometimes, we can be way off base about that and end up spending money on something that we think will make us happy but doesn’t in the long run. Good luck!
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I spend around 21% on housing and utilities. I live in London, where flat sharing is very common until your 30s. I live in zone 1 and have two flatmates. I love the location, and on top of everything, my commute is 5-7 minutes BY FOOT, depending on the elevator and traffic lights.
Your article comes at the right time though, as me and my BF have lately been talking about moving together. You’d think my housing costs should drop with the move, but I don’t think so..
BF has three kids that stay with him part of the time. So it’s no option to move into a 1 bed flat! We need at least 2 bedrooms, one of which needs to be big enough to accommodate 3 pre-teen boys. Another problem is the location. BF needs to stay in a certain part of London. That is because of his family situation and it was his absolute requirement that was made clear to me when we started dating, so nothing I can/want to do about it.
I cringe at the thought of my housing costs doubling (and after some research, that would be the case, even if BF would pay more rent than me). I have automated all my savings, and live very frugally, currently saving ~55% of my net income. Couple of more years and I could put down a 30% down payment on a 2 bed house. Not so if I move in with BF. On the other hand, money shouldn’t be the determining factor on this.
Could use some advice. Has anyone been in this situation? What did you do?
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With three pre-teen boys, you’re going to need to factor in an increased grocery budget, as well as housing
(if you proceed with combining households with their dad…).
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Is there a “hurry” to move together? I would stay as is, unless there is a huge reason to change.
If yuo love one another and enjoy his company, living separately for a few years more – while annoying maybe- won’t cuase the end of a relationship.
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I don’t think it’s good for the kids if you move in without a legal commitment. Get married before you move in together. If neither of you are ready for that sacrifice why should you sacrifice financially? What if it doesn’t work out?
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Personally, I would say do not move in with your boyfriend before getting married. You will not only be dealing with financial issues but emotional ones as well. The children will definitely be a very big part of the emotional side of your relationship. Keep on saving and think some more before moving.
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Your current situation sounds wonderful… I’d honestly have a really hard time giving that up! I Don’t really see why you should have to pay more to accomodate his kids and his situation. You’re already offering to make a big sacrifice by giving up your great location. I really don’t think I’d do it. There’s nothing wrong with keeping your separate spaces, especially if you’d end up subisdizing him and his kids.
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Nina, I’m in agreement. Do NOT rush into this situation. I married a man with two children and was not prepared, no matter how many conversations or how much confidence I had going in, for how intensely his children impacted my life.
If you’re not 100% certain about the relationship, things could start to get very messy, very quickly. Who pays for what portion of the kids’ ever-growing grocery budget? Who runs them around to school activities and sports outings? Who takes care of them when one of you travels? Who pays for their medical care when an inevitable “oops” happens? To what degree does the ex contribute? Does your partner pay child support? How much of YOUR money will go to filling holes in the family budget if he’s paying child support and your housing costs increase?
Unless you’ve been a step-parent before (which, make no mistake, is exactly the role you will be filling), you cannot possibly predict how this move will turn your world upside-down. If you like the roller-coaster feel and your relationship is strong enough, go for it. If not, there is absolutely no reason to rush.
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I’m in agreement. I read the initial post and thought “London? Zone 1? Be still my heart!” I’d have a hard time giving that up, too.
I wouldn’t move in with him unless you have something firm in place – an understanding, an engagement, marriage, whatever – something that says you’re on the same page and it won’t be “here today, gone tomorrow.”
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This article is very relevant to me. I am in a similar situation. I live in one of New York City’s outer boroughs, it’s cheaper than Manhattan, but still expensive compared to other places in US. I own a 550 sf one bedroom coop, and my monthly housing cost including utilities is about 20% of my take home pay. It’s as cheap as it gets here, but my apartment feels cramped. I have a child who lives with me and would like to have a second bedroom. I am selling my apartment and am planning buy a larger apartment, which will increase my housing cost to maybe 37% of my income. I don’t know if it’s the right decision, and am going back and forth with myself thinking about it.
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Sometimes I feel like people attack the “money problem” from only one angle when a two front assault is necessary!
People focus on the easy little wins (which is important) but lose sight of the big wins. When was the last time you asked for a raise at work? Take the initiative and schedule a performance review.
I’m in a unique circumstance but in the past 9 months I’ve requested two reviews. Each one came with a 6k raise for a total of 12k. That is a big win. Putting bricks in your toilet is a little win.
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Agreed. A lot of people don’t realize they can call their mortgage company and ask for a lower interest rate. This isn’t the same thing as a refi, with closing costs, this is simply a reduction in your interest rate for the remaining life of the loan. We’ve done it twice, and it worked both times.
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Good to know. Thanks for sharing!
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I’m thinking about doing this with my credit card (it’s at 15.3%). Any tips on how to approach the conversation with the bank when you call or do you simply say that you’d like to reduce your interest rate?
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Can you explain this a little more? What financial institution is servicing your mortgage? Just wondering if this is possible with larger banks (e.g., Bank of America, Wells Fargo, U.S. Bank), or only smaller institutions like credit unions. Did you just call up one day and say, “I’d like you to reduce my interest rate,” or did you need some kind of leverage? Thanks!
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We use Citi Mortgage, and it was as simple as calling them up and asking to talk with someone about an interest rate modification.
What I like is that with the mortgage, a modification results in a lower monthly payment, which means more cash flow freed up for other debt reduction or savings, or whatever.
With a credit card, the process is much the same. You call the customer service # and say you want to talk with someone about a lower interest rate.
My husband got one of his cc’s from 15.9% down to 14.5% in 5 minutes, and I got one from 12% down to 11%. It helps to have a solid track record of on-time payments if you’re going to try it.
I hope this helps!
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Thank you! I really enjoy your posts, CincyCat.
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Wells Fargo wouldn’t change our interest rate when I asked. They would only agree to a “streamlined refinance.”
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Carol,
Rats!! What was the process for the “streamlined refi”? I know 5/3 supposedly offers a “rapid refi” option for a low flat fee. Is Wells’ program something similar?
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My wife and I just bought a house…much bigger than we need right now (but were able to afford it based on the current housing market and interest rates). It has all the things we want/need to be our forever home, for raising our future children.
Mortgage/insurance/taxes/utiltiies run about 24% of our take home pay. We’re able to squeeze about 30% of our take home pay for savings/debt repayment. The rest is food/entertainment/loans/everything. Right now, our main goal is to have our loans (car and student) paid off within the next 5 years, so that we can easily afford our lifestyle on one income if we ever choose/are forced to go to that.
I feel the safest way to live (and is often overlooked) is to live within your means on a single income (even if you have 2). If you ever need more money, the other person could always find a part-time job and maintain their home responsibilties. Obviously not everybody can do this, I’m certainly not right now…but that’s why it’s our goal
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I opted to keep the family home (4 bedrooms) after a divorce 6 years ago. I rationalized that the continuity was important for the kids, but the reality was that it was probably more important for me. I received child support which helped mitigate the cost, but my youngest graduated high school in June and the child support has ended. I am starting to feel the pinch of paying 33.3% of my gross income for housing (mortgage, insurance, taxes, basic utilities). And that doesn’t count maintenance, which can be costly on an older home.
Although not necessarily rational, I am emotionally attached to the home where both kids were raised their entire lives. However, it is way too large for 1 person and starting in September I will be helping pay for two college educations (instead of just one). Change is hard for me and it usually takes me a good while to make decisions, but the writing is on the wall. I need to do something – sell the house, get a roommate(s), rent this house and in turn rent a smaller place for myself… Decisions, decisions
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KB,
I hope you can make the hard choices now so that the hard choices later are easier. It is never easy for any of us. Maybe focus on what you will gain if you get rid of the house? The kids will have their education paid for? They won’t have to worry so much about mom? I have to say that I worry about my mom all the time – she would have a lot more money if she sold the 4 bed, 2 bath house she lives in now, to live in something more appropriately sized for her.
Something to think about…
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We’re strong believers in buying/renting only as much house as you truly need. That two people were renting a 3-bedroom house boggles my mind. What do you need the other two bedrooms for? An entertainment room or guest bedroom is not a “need,” it’s a want. A separate bedroom for each child is a want. An office? Perhaps you could count that as a business expense, but you could also turn your living room into an office.
I think what really makes people think they “need” more space is the fact that they have too much Stuff and not enough space to store it. That’s why people feel cramped. If you don’t have room for a dinner table, there are solutions besides getting a bigger place: get rid of your office desk and work at the dinner table, get a smaller dinner table, get rid of the dinner table and eat off TV trays or the coffee table in the living room. Technically, a dinner table is not essential to survival. That’s just one example.
So yes, I do think you risk lifestyle inflation if you move to a larger space sooner than you need. Having too much space induces you to buy Stuff in order to fill it up.
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Funny you should mention a dinner table. When my husband and I were first married, we didn’t have a dinner table. We ate in front of the TV! (No rules!!) We put our computer desks in the area in our apartments that is normally where you would put a kitchen table.
When we moved into our house, we still didn’t get one, and we had no living room furniture at all since we put our trusty, dusty couch downstairs in the family room. I was about 8 months pregnant when we figured that we should probably teach the next generation some semblence of table manners, so we bought a little 3-foot round kitchenette table with two chairs. Today, we have a large, 1980′s model wood table (think fat, spindle legs) that I got on craigslist for a song. Not only was it a great find, but it came with two leaves that make the table large enough to accommodate 10 people, so the family isn’t cramped when they come over to visit. Bonus!
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I agree this could be seen as wasteful but it works for me for many reasons.There are not many two bedroom houses in the area we live in and neither me or my best friend wanted to live in a three person household. If I were to rent a one bedroom apartment my rent would go up by 50% or more, so the roomate option was definatley a cheaper option.We both save more than 50% of our after tax pay, so we don’t see a reason to get another roomate, who while they would reduce our bills would likely add stress (due to less privacy, more mess etc). Also the bill reduction wouldn’t be huge as the third room being very small would fetch a much lower rent. We both make respectable salaries and would rather make cuts in other areas (for example I don’t own a car). I also study via correspondence so it is nice to have a place to study that isn’t my room and my roommates main hobby is arts and crafts so the extra space does get used heavily.
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Charlotte, with respect, you are incorrect. Separate bedrooms for opposite-sex children are not a ‘want’; it is a legal requirement unless your children are under the age of six (in Canada, anyway).
Cram them in if you like when they’re toddlers, but a family with two opposite-sex children cannot live without three bedrooms. Unless the parents are permanently sleeping on the couch…
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1. According to my spreadsheet, we spend 15.83% of our take-home pay on housing (mortgage, gas/electric, land-line phone and water). Taxes & insurance are paid separately since we are not required to pay escrow (and, we don’t trust it), so we pay these from an online interest-bearing checking account. To seed this account, we pull from our checking account into another account on a fixed-sum basis each month (this saved us a TON of mental stress of scrambling to come up with hundreds of dollars twice a year). So… I estimate that our total housing is in the neighborhood of 18-20%.
2. Our priorities for housing have definitely changed over time. When we were poor college students, a shotgun apartment on the bottom floor of a converted house (with iffy heat & a leaky roof) worked just fine. When we graduated & got our first “real jobs” we upgraded to another apartment with two bedrooms, and promptly filled bedroom # 2 with boxes of Stuff that we dragged with us from college. Two years later, we moved into a much nicer apartment with a higher rent, that was closer to the cost of a mortgage. We did this deliberately to see if our budget could handle the increase. It could. We finally moved into a real “house” in an affordable neighborhood (but iffy school district) with 4 bedrooms, a fenced yard & finished basement, last renovated in 1987, and I immediately got pregnant. We’ve been in our cozy little cape cod for 10 years. This is house is our family’s “home” (not an “investment”), and I can’t imagine living anywhere else.
We did upgrade the kitchen , and painted/replaced the carpet in the basement (see 1987, above), but other than that, we’ve made no major changes to the house.
3. Our consumer debt is one area that was a real struggle for us. Right now, we pay more per month on credit cards (with our snowball payment plan) than we do on housing, taxes, insurance & the girls’ tuition combined. Yes, we could absolutely knock the debt out sooner if we weren’t paying tuition, but there is NO WAY we’re sending my kids to our local district. That’s one of the reasons we chose to live in a less expensive neighborhood – so we could afford to pay tuition. One regret with the high amount of credit card debt that we have is that we really can’t afford to enroll the kids in any sort of sports, clubs, dance lessons or anything. (This is not a consesquence we anticipated when we initially took on the debt, pre-kids.)
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I think it is important to note that our current mortgage is $200 LESS (after a recent modification) than the rent on the last apartment that we lived in, 10 years ago. That boggles my mind.
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That is why long term it is cheaper to buy – but it comes with compromises that people don’t realize at the time – namely you have to stay there long enough (not trade up, not change jobs and move etc…) to reap that benefit of you housing costs going down relative to everything else. The investment part isn’t that your house is always worth more than you paid (and clearly the last few years are evidence of that) but that someday – you just have to pay taxes, insurance and utilities.
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I agree completely. A house is something you commit to for the long term, in my mind. That said, we didn’t buy a house sooner because we were still college students when we first were married and didn’t have the money, credit history or the time to commit to a house for several years.
I say “time” because houses mean mowing lawns, cleaning gutters, more cleaning (in general), and all sorts of other sundry “keeping house” type tasks that are very time consuming.
With an apartment, you only have to worry about 600-800 square feet, and you don’t have to spend an entire Saturday gleaning gutters when you have an exam to study for…
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I agree in not being so hard on yourself over your wish for more space. And only you know what you make and how badly you really need it.
However, maybe some of it is psychological space you are looking for. It’s really hard to be with anyone, even a loved one, 24/7. You simply need to be away from each other more.
If you decide you truly can’t afford to move, why not think about taking everything off the walls and putting furniture in the middle of the room and then starting over with the “living” plan. Maybe just a fresh look will help.
One more thing. You may get another apartment away from pubs, but no guarantee you won’t get a neighbor with a cranked up stereo. For my mind that equates with inquisitional torture.
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I personally think it would be hard to live in a situation like that, with both people living at home, with so much shared living/working space. You have the “need 1 more room” problem. Since you are renting, you have flexibility. It doesn’t cost anything to look around at what is available, see if there is anything that would work better but still be in budget. though it sounds strange, I knew some people who used their extra room as “double” office; with 2 desks facing opposite directions.
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We spend about 25% of our combined income on PITI. This seems reasonable, though it feels like a squeeze sometimes.
We bought this house thinking we wanted a large yard for the dogs and extra rooms for visiting family. The extra rooms have come in handy at times, even after the family moved here and got their own places; we have had various friends staying with us over the summer, providing free dog-sitting while we’ve spent weekends away, and doing a better job of cleaning than we ever do, so that’s been a plus. The yard, on the other hand, is a curse beyond our ability to manage, and I’ve grown to loathe it dearly. (I know, pry open the wallet and hire a gardener. It will be worth it, I swear!)
We are unlikely to move anytime soon, or possibly ever; our house has lost a fair amount of value since we bought it, and though our priorities have changed, they have changed in opposite directions! I want a smaller, newer space with way less maintenance, but my husband wants a larger house to host larger parties and display some of his vast acres of Stuff. So here we stay…
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oops, if we use net income it’s closer to 30%…
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Once again, great article, although it did get a bit off-topic frm “earning more, spending less”.
Our mortgage, taxes and insurance = 16% of our combined take home pay.
But, we’re actually spending about 50% of our income to pay off the mortgage as quickly as possible. (Which is a whole other debate in itself.) The house meets most of our needs and will continue to do so for a long time to come, we hope.
And to answer your last question, balancing debt repayment and our other goals is a constant struggle!! We are trying to continue living as frugally as we can, while grabbing as much overtime and other income sources as possible. The goal is to pay off the mortgage in the next three years. Then we will have more for other goals, like a kitchen renovation and a trip to Asia. But its hard, in the meantime, “living like no one else”. People say we’re crazy, as I suspect they do to you for living in a tiny ‘student’ apartment.
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I’m actually in the camp of spending less vs. making more. Sometimes when you make more – you have to spend more time – making it.
As for housing, our living space is reflective of our income and very modest for a family of three. No need to spend so much on more housing than you need.
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I spend 9% of my take-home pay (5% of gross income) on housing and utilities (gas, water, electricity, internet) by living with roommates in a 3000 square foot house in Washington, DC. I save/invest 67% of my take-home pay (including Roth IRA) and save 20% of my gross income in my 401k (12% contribution + 8% employer match). I’m considering buying a house and renting out rooms to profit from housing.
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