(7 minute read)
Okay, so these truths apply year round, not just at Christmas 😉 Money matters year round, not just around the holidays – and your big picture financial goals aren’t going anywhere. When lunging into adulthood where real money is made, saving for a second (or third) property, or lunging out of a divorce (where your assets have been cut smack in half), there are big money decisions around housing costs that weigh heavily on near everyone’s minds that are not going anywhere and can’t be ignored.
The fact of the matter around our “monthly budget” is that it’s easy to get carried away with housing costs. Owning a home and paying a mortgage is one thing, renting is another. When you’re paying a mortgage down (home ownership) you’re investing equity into one big-ass asset, your home. When you’re paying rent, you’re paying someone else’s mortgage and building their equity in the rental unit you are renting.
As reality would have it, it’s not ultra-easy to come up with the mega bucks to fund an increasingly expensive down payment (10-20% the home’s total cost, in order to have your mortgage insured) which makes renting the alternative. Rent in many affluent cities can be sky high with little choice otherwise than to spend the mega bucks on your living digs. p.s. Home ownership is not the answer for everyone. There are other options, though with all, it is always situation dependent. To find out which big money investment is right for you right now, jump here.
Back to our topic at hand.
4 truths I want you to consider
- Dollar-spend math and the 35% rule. As a rule of thumb, I like to say 50% of your total net income is to go towards living expenses (rent/mortgage, heat, power, internet, food, etc.), and as a secondary rule of thumb, having no more than 35% of this 50% go towards rent (or mortgage) specifically. I.e. Your take home pay (net income = your income once taxes have been deducted) is $2362, as you earn $150,000 gross annually. In this case, rent should not exceed $2362. In some world cities where inventory (apartments available) is low and there are more occupants than there is inventory, supply and demand takes over and the cost of housing increases. No matter the scenario, you have to make due.
Weigh your living costs against where you work. If you’re going to be saving money on transportation & parking because you live downtown and near your office/place of work, allocating a bit more $ to an apartment that affords you this convenience, this works. If rent is significantly lower someplace farther away from your work, and you have to make up the time (commuting) and are spending more money on public transit or gas + parking, the lower rent (and the time you’re spending commuting) makes less sense.
Does this fact and math have anything to do with Christmas? Well, if you’re spending WAY too much on rent 12 months of the year, you’ll inevitably have less to spend in other areas like buying gifts for others or flying to see friends & family, so yes this point is totally Christmas relevent 😉
2. For function or style. Let’s shift to the mindset that you’re making a killer income and have saved some of it in order to afford that down payment – because you’ve planned, been consistently saving. But wait, a gorgeous place comes up and it’s a bit pricier (and you desperately want to make the move). Work from home? The ambience is that much better, as is the neighborhood – and you’ve still got a ways to save should you wish to purchase a home? I say – pull the trigger (although each individual’s circumstance is totally unique).
If you’re close to buying a home and you want it so bad you can taste it, live with less – or actually downgrade your living digs to speed up the cash-saving process. I wouldn’t necessarily recommend this if you’re home is your office, you record video, or have client meetings at your home – though you will know what feels right and what motivates you, all while budgeting on the monthly (and for those longer term, bigger vision beach-front goals)!
What’s this point got to do with Christmas? Well that depends, are you hosting? 😉
3. For love or money. You’re thinking about purchasing a home or you’ve already purchased a home. What’s your motive? Did you buy this baby because you love it or did you buy this as an investment to just make money?
Kind of like doing what you love and the money will follow vs. entering into a profession that you think will make you money, buying a home speculating that it’s going to blow a windfall into your bank account is a false assumption. There are 101 externalizers (outside forces) that can affect the value of your home (and the interest rate of your mortgage). The recommend on home purchase (off hand and incredibly generalized): do not make an investment you can’t expect to get out of in at minimum 5 years. As said, geographical location, health of the market AND the economy are all factors that will affect your buy-hold #, though as a rule of thumb, that’s one hefty, non-liquid investment (liability) you will have entered into should you get bored or not be afforded that windfall (positive return from the sell). How to tell if you’re ready? Jump here.
Point: if you’re looking to invest, ask yourself why. Home ownership? Rental income? And align your needs with your investment, not your money-making capital gains mojo.
4. The extras. So you’re renting and plan to move to another place or buy eventually, but you’ve still got a ways (as in years) left to go. But, you want to pimp your shack out and make it your own! Who doesn’t like an upgrade here or there?
Note: make investments that are moveable without creating major damage to the piece when it needs to be moved. Also, buying pricey furniture to suit your space now vs your future space is a huge gamble. That $6000 sofa fits now, but what about when the time comes and it just won’t fit through the door of your very first home? Eeks. Wood is always going to get damaged in a move, glass is easier (as long as you’re careful). Decor items that are versatile and not odd shapes, i.e. bar cart, throw pillows, rug, button Moroccan pouf, etc., these are all good scores to help spruce in the meantime. Art is another and a good office chair, that – if you make the well-thought investment in these items, they should travel (and relocate) well.
But do you need the extras? What are you saving for? Are you living within your monthly budget (which includes financial obligations and your big, bad savings plan)? Check yourself before you wreck yourself and see who you are doing these things for, around your home/house. Are these investment short or long term, designed to bring you joy, or are you trying to fill a void?
Back to Christmas, and your big financial goals. Although crazy easy to be generous beyond belief and spend over the top, it’s best to only do that if you’ve been accounting for this moment all year long. The time it will take you to dig yourself out of a financial hole or set you back, weigh the trade-off.
How bad do you want that beach house or cozy nook in the mountains? Think about that when you’re doing your Christmas investing (shopping) 😉