Wednesday, September 30, 2020

Housing Expenses

As I mentioned in my last post, I wanted to start sharing strategies to help you keep your expenses in check.  When attempting to build wealth, your gap between income and expenses is going to be the engine that drives your wealth building progression.  Remember that it doesn't matter how much money you make; it matters how much money you keep.  Generally, the largest expense you will have is housing, so let's start there.  When my wife and I first started out in 2005 we kept our housing expenses super cheap by living in a small 1-bedroom apartment.  Our rent in our first year of our wealth building journey was $325 a month.  The low rent helped us keep our overall monthly expenses to a minimum and we were able to save $36,000 in our first year.  In the graph below, you can see our total housing costs from 2005 to present.  The total housing cost value I show here is the total of rent or mortgage plus the property tax and homeowner’s insurance.  I didn’t include home maintenance cost or remodeling, but any of you homeowner’s know that those costs can be significant at various points in your homeowning experience. 

  In 2005 I didn’t think we could reduce our housing costs much more.  However, in 2006 an opportunity came along for us to purchase a small 2-bedroom 1 bath 800 square foot fixer upper.  The price was $65,000.  At this point, we’d saved enough money to purchase the small house with cash, so we did.  The house was so cheap that the property taxes and insurance were very low.  The first full year we lived there (2007) represented the lowest housing cost to date.  That year our average monthly spend on housing was $173.  Now how did housing cost impact our ability to save you ask?  The graph below tells the story.

When we had very low housing expense between 2005 and 2008, we were able to save a really nice chunk of change, despite our lower income.  However, in 2008 I started my first real job.  We relocated and sold the little paid for house and moved into a much bigger more expensive house.  In 2009-2012 we saved less money even though I made more money.  Remember, its not how much money you make, its how much money you keep.  It took me 5 years (2008 to 2013) of steady pay raises to get back to and exceed the level of savings that we had in the first 4 years of our wealth building journey.  In 2008, we moved up in house too quickly and it negatively impacted our ability to build wealth.  We still live in the same city but are now on our 3rd house in our current location.  So, what lessons can we glean from my experience with housing expenses and strategies to keep them low.

1.      Try to start out with very low housing costs and save the money not spent on housing.

2.      Use your savings to try to buy a very small place with cash and live there for several years.

3.      Slow and steady.  Sell the small place when you outgrow it, but don’t make a big jump up in housing.  This didn’t stop us, but it did slow our wealth building.

4.      If you can pay cash or pay off your house, this greatly increases monthly savings, even if you don’t make a lot of money.


In the next post, I’ll discuss most people’s second largest expense… cars.  See you next time.



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The Real Millionaire

 I am a 39-year-old man with an amazing wife and 4 awesome kids.  I am also considered a net-worth millionaire.  Achieving this goal has alw...