Today we’re going to talk about (most likely) the biggest expense in your budget! That’s right, today’s topic is your housing expense. Most people have this expense at the top of their budget. And most make major money decisions having in mind how much this monthly cost is, because no one wants to accidently spend their rent money. And since this is the largest percentage of your budgets, I would recommend doing more research on this topic than any other to ensure you are saving as much as possible. So let’s get to it!
For purposes of this article, housing is defined as; “The cost of owning or renting property as a means of shelter and housing for you and your family. This includes Mortgage (or rent), Taxes, and Insurance.”
How Much You Should Budget?
There are many types of advice out there, from taking a certain percentage of your monthly income vs. the mortgage, to multiplying your annual income x 3 or whatever to reveal your maximum purchase price. Let’s take a look at a few examples:
1. No more than x percentage of your monthly income. This is a simple calculation that can help quickly determine what you can and cannot afford in terms of housing. Dave Ramsey says no more than 25% of your take home pay. I say more like 35%, but obviously, the lower the better.
Update: Matt from Mom and Dad Money had some great insight on this point in the comments, and said it better than I could:
I think it’s first important to consider your long-term goals and take those out of your budget, and then see what money you have left over for shelter. Obviously there are considerations like living in a low-crime neighborhood, school system, etc. that will take you beyond simply viewing housing as a budget line item, but it’s dangerous to go the opposite route and simply look at percentages without understanding how it affects your overall goals.
When we bought our house, it was closer to 40% or so, and now it’s even more because Michelle is now at home. I wouldn’t change our situation now, but I think it’s wise to shoot for the least amount possible.
2. Multiply your annual salary x 3. This number is specifically used for the purchase price of your house, and can help determine what you can afford. For example, if you make $50,000 per year, you can afford a $150,000 home. This is a good, conservative rule to live by, and can help keep your mortgage and taxes low. Let’s run some basic numbers to see how this works out monthly.
- $50,000 – $7,500 in taxes = $42,500/12 = $3,541.67 monthly income.
- $150,000 house with a 30-year note at 4.5% = $760 + $150 property taxes = $910 monthly mortgage.
- Divide that $910 into the $3,500 monthly income, and that’s about 26% of your take home pay for housing.
3. Buy whatever the bank says you’re approved for, who cares. Some people take this approach, especially those who think credit cards are free money. They go get pre-approved for $800,000 because their parents cosign the loan, the live in the McMansion for a few years, make a few payments, then walk out on the property, destroying neighborhood home values and move back home to the basement. Obviously, this is the method I recommend.
Common Ways People Blow This Category
Housing is crazy expensive. I might even go as far as to say that the rent is too damn high! But that’s no excuse to be wasting hundreds per month on a place that is overvalued.
The most common way people blow this category is not doing their research. Add that, on top of making an overly-emotional decision on where to live, and you will be wasting money each month. And that’s pretty much it.
Best Ways To Reduce Housing Costs
Nowadays, there is absolutely no excuse for overpaying the cost of rent or your mortgage. There are tools like Zillow.com that show EVERYTHING you could ever want to know about house values, rent values, comparable housing values, history, details, pictures and everything else.
For those that are renting, you can compare several places that fits your needs, and even negotiate with the one you want to lease. You can find comparable rents nearby and bring it to them, asking them to lower the cost of the apartment you want. And this is a tactic you can use when renewing your lease as well. If they are raising your rent above the average, bring them some printouts of places you could move to with lower rent. At worst, they could say no, but I know of people who have had this work, and are saving money over what they would have been paying.
And for those buying, your real estate agent has so much information at his fingertips, it’s ridiculous. On top of Zillow, they have worked with hundreds of buyers and appraisers, and can give you a real feel for what a place is worth. And if you have an awesome real estate agent like ours, they can help talk the price down and get you in much cheaper, saving tens of thousands on the purchase!
In general, you can choose to live in a place with lower cost of living and taxes, and save yourself a bundle. You can also choose to live close to wear you work. This won’t save you on housing, but will save a TON on commuting costs.
Whatever Else I Feel Like Writing
Housing is a HUGE expense. You should never jump into it without doing TONS of research, and reading all the fine print. Know exactly what you are getting in to, and the long term financial implications of renting or buying a home. You can really get ahead by keeping this cost as low as possible for as long as possible, allowing you to free up your cash flow, invest and/or pay down your mortgage quicker if you buy.
That being said, where you choose to live and what house you choose to buy IS an emotional decision. Do NOT disconnect your emotions from this one if you plan on making it a home. And for those purchasing, I suggest approaching it as a home first, investment second, but do not neglect either one. I do believe you can have the best of both worlds, but don’t hate yourself if the value drops, and also don’t ignore the facts when making the purchase.
Comments: Do your own or rent currently? How did you ensure you are not wasting money on housing costs? What would you have done differently?