House on suburban street with 'For Sale' sign in foreground --- Image by © Royalty-Free/Corbis

Housing: Getting Your Single Largest Expense Right

Housing is most people’s biggest expense.  That’s why, of all of the expenses we each have, it’s essential to get our housing costs right.  It’s one of the most important keys to being able to be generous, save and invest adequately, and live with financial margin and peace of mind.

Here’s how to spend smart on housing.

How Much of a Down Payment Should I Make?

It used to be normal for people to make a down payment of at least 20 percent.  That became anything but normal during the run-up to the housing bubble.  Now, it’s coming back into vogue, and I think that’s a good thing.

Putting 20 percent down demonstrates the discipline to save.  Plus, it prevents you from having to pay private mortgage insurance.

How Much Can I Afford to Pay Each Month?

Lenders typically tell people they can afford to devote 28 percent of their monthly gross income to the combination of their mortgage, property taxes, and homeowner’s insurance.  When you include other debts, such as credit card balances, student loans, and vehicles loans, they want all of those monthly payments plus housing to total no more than 36 to 40 percent of your monthly gross income, depending on the lender.

I believe it’s best to spend less.  As I developed Recommended Cash Flow Guidelines and Recommended Housing Guidelines (found at the same link) for households across nine different incomes and four different household sizes, I found that the ideal is to spend no more than 25 percent of your monthly gross income on housing (mortgage, taxes, and insurance)—preferably no more than 20 percent—and have no other debt.

In some especially high-cost parts of the country, you may need to stretch that a bit, but that means you’ll have to spend less than my recommended amounts in other categories.

Should I Base the Payment on One Income or Two?

Here’s the kicker.  It’s best to stay within those guidelines on one income.

What?  That’s impossible, right?  Well, as I like to say in workshops, the common approach to money in our culture is to save too little, carry too much debt, live with too much financial stress, and fight about money too often with the people we love.  Do what’s uncommon and you’ll be able to enjoy uncommon financial success and peace of mind.

Basing housing costs on one income is especially important for young two-income couples that want to have kids one day.  If you want the freedom to have one person step out of the paid workforce while raising those kids, it’s essential.

But it’s important for others as well.  Buying a house that requires two incomes is risky. What happens if one person loses their job?

What If I’m Spending Too Much on Housing?

Please don’t shoot the messenger, but if you’re spending much more than my recommended amounts on housing, your finances are probably going to be a challenge.  It’s going to seem impossible to be generous or to find the money to save or invest.  In that case, you should consider something radical, like moving to a more affordable house.

I know – it sounds crazy, completely unrealistic.  Selling a house, especially in this economy, can be tough.  The whole process of moving is time consuming and disruptive.  But I’ve met people who have done exactly that.  They were living in houses they realized they could not afford and they moved.

One couple put their house up for sale at a time when other homes in their community were sitting on the market for over a year, and yet theirs sold within 30 days and for nearly the full asking price.  The other sold their home and then lived in the basement of the home of some friends.  They stayed there for three years as they saved up enough money for a healthy down payment on a house they could truly afford.

Both couples took tough, counter-cultural action, and they got to a better place financially, emotionally, relationally, and in other ways.

For most people, housing is the expense category that can make you or break you.  Getting it right is essential for those who want to experience uncommon financial success.

What are your thoughts on my housing recommendations?  Please leave a comment below.

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7 Responses to Housing: Getting Your Single Largest Expense Right

  1. Christa April 2, 2012 at 6:02 AM #

    Question for you Matt. Our housing is at 30%. We carry no other debt and we’re meeting our retirement and college savings goals and tithing. Our financial adviser recommended that we refinance our home to 15 years. But that puts us up over 30% of our monthly income. Is it worth it in order to pay the house off earlier and pay less interest?

    • Matt Bell April 4, 2012 at 11:15 PM #

      Christa – I have to give you the dreaded “maybe” answer. I’d have to know more information to give you the best answer. In general, though, I like the idea of being done with mortgage debt sooner than later. So, if you can still hit all of your goals, and assuming you have a healthy emergency fund, refinancing to a 15 year mortgage may make a lot of sense, especially with rates as low as they are.

  2. Miiockm March 28, 2012 at 11:43 PM #

    I think 20% should be the minimum downpayment. I can’t believe people were getting mortgages with zero down.

  3. Kurt @ Money Counselor March 27, 2012 at 2:49 PM #

    My thoughts on your recommendations? One really: Awesome! Old fashioned common financial sense, the sort that we can as a society either 1) adopt, or 2) bail everyone out periodically.

    Thanks for the post.

    • Matt Bell March 27, 2012 at 9:14 PM #

      Thanks, Kurt. The principles of wise money management aren’t that complicated, are they? It’s acting on them that can be difficult, especially with the culture seeming to move in such a different direction.

  4. Miriam Kearney March 27, 2012 at 10:06 AM #

    I am an early retiree (for a lot of reasons I won’t go into) and a recent widow. My husband and I followed our dream to own a home on a lake in the country but in the end, ended up with too much house and not enough money and then he passed away. I am solving my over housing problem differently than you describe. I am triplexing the 3 storey Victorian and plan to live on the lowest level myself (which has the walkout to the lake). I am doing most of the work myself with the help of my daughter and one low-cost labourer (who happens to be my upstairs tenant). When it’s all done I should be able to live without cost in my home and even have about $200 positive cash flow.

    • Matt Bell March 27, 2012 at 10:18 AM #

      Miriam – What a great, creative idea! I love the idea that you get to stay in the house, enjoy the lake, and actually make money from the house.

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