Hi everyone, my wife and I spent part of our last two weekends house shopping and I hated it (but if I’m being honest, I kind of didn’t). As I’ve referenced before, I’m a father of two young children and we currently live in the city. And while we’re lucky enough to be in a home with enough space for our needs, city living still has it’s challenges- detached garage, no yard, constant traffic, poor public schools, distance to nearest Costco, etc. And as these challenges grow from minor and infrequent inconveniences to larger and more frequent ones, the thought of moving to the suburbs becomes more and more appealing. .
How much can we afford?
Thankfully this is the easy part.
Up until now, we’ve allocated very little of our income to mortgage expense- a little less than 10%. This is only partially by design. My wife and I work in the corporate world and in our jobs, we receive (or can receive) significant bonuses. My bonus the last two years is more than double my base compensation. This is great when you get it but bonuses by their very nature are difficult to rely upon. So for our fixed expenses we’ve always lived within our base compensation. This is ultra conservative as a $0 bonus in my industry is also completely unheard of but I’d rather be conservative with money than aggressive. A move to the suburbs will not allow that to continue. We will need to allocate a certain amount of our bonus income to our monthly budgets which will now have to support a larger mortgage.
Thankfully, I’m a mint.com addict and have tracked every penny spent and earned for the last decade. For allocation purposes, I’ve cut each bonus check in half and that average is a safe conservative floor for expected income. This tells me how much we can afford with significant buffer in case things go south.
How much should we spend?
This is not a repeat of the last question. Just because you can afford something doesn’t mean you should buy it. See my post on the Tesla. There’s an opportunity cost for every dollar spent. And this is the problem. In the past year I’ve purchased two rental properties, invested in a syndication deal, sent my kids to fancy schools, went on multiple family vacations, and still lived well BELOW our means.
We can afford to do this partially becuase we control our spending and don’t indulge too much; but, mostly because we have a mortgage that’s under 10% of our annual income. Moreover, that mortgage is in a highly desirable part of town that’s appreciating rapidly and will eventually be realized by way of rental income or a home sale.
A new house changes that. Unlike other homes we’ve purchased, the appreciation in this new home will not be realized because the home will not be sold or rented (at least that’s the plan). Meaning, everything we put in the home is a sunk cost.
Does this mean, it’s not a good idea to buy a new home? It sure does…from a financial perspective. But from a happiness and lifestyle perspective, you sometimes have to make an unwise fiscal decision. A sunk cost is okay if you’re benefitting in other ways and the right house, in the right community, with the right schools offers us a ton of benefit. The key is to make a decision that’s hopefully not too unwise and I think if you go into it with this perspective you’re already ahead of the game (I hope!).