Don’t Let An Old Rule Drive You Broke

October 30, 2015

Within the last several months, I’ve been contemplating the purchase of a home and my sons are a big part of that contemplation. My ex-wife and I split up about 8-9 years ago and I have lived in a few places since the separation/divorce. I’m currently about 15 minutes from my old house (that she still owns) and it’s a quick, easy drive but with two teen boys with active social lives, it seems like that 15 minutes is resulting in 30, 60, 90 or 120 minutes on the Beltway (our version of a highway) on a regular basis. 

Last Saturday, my middle guy had his homecoming dance. With his job at a pet store that morning, getting home from work, pictures with his girlfriend, dinner, the dance and then a little after-party, there were a lot of trips taking him from one place to the next. I spent most of that day in the car with him, my youngest and the dog. (A little Febreeze at the end of the day made the car inhabitable the next day.) I felt like I should just have mail delivered to the car since I spent more time there than at home.

This Beltway time along with conversations with the boys about how they’d love for me to be close enough so that they could walk to my place after school (actually that’s the bigger reason) has me looking at a few new housing options. I’m in the midst of the rent vs. buy decision right now. One of the things that I absolutely believe in and refuse to budge on in this decision is the percentage of income that I will pay for a roof and running water.

I’m not opposed to sleeping in a tent, but that’s not a long term answer and my sons wouldn’t necessarily be on board. Plus, how would I watch Game of Thrones when it comes back? (I’m still not believing Jon Snow is REALLY dead. I hope that’s not a spoiler alert but if you haven’t seen the final episode from last season…that’s on you!) I have lived on a boat for 3-4 years post-marriage, but that drive is not workable with the school schedules.

I’m currently in a condo that I found through a lucky break, and the monthly cost of housing is very manageable. My goal for a new place would be to lower my cost of housing while getting closer in proximity to the kids’ schools. 15 minutes seemed close when I moved there 2-3 years ago but with increasing social activities, that 15 minutes gets multiplied repeatedly.

Most real estate agents and financial “experts” will talk about purchasing a home (or renting) and how much is reasonable to spend. The guidelines are usually along the lines of spending no more than 33-36% of your gross income on all debt. This means that if you have no credit card debt, student loan debt or car/consumer debt, you could spend 1/3 of your gross income on a mortgage or rent. For someone making $60,000/year, that would translate into $20,000/year on housing or $1,667/month. If they get paid twice a month, that would be roughly a whole paycheck devoted to the mortgage with the second paycheck of the month for the rest of life’s expenses.

I think that old rule of thumb is outdated and and can have potentially devastating impacts on your financial life. Having spent the last two decades spending time with real estate agents and mortgage brokers, their philosophy was always that you should buy as much house as you can afford today and your income will grow over time and make the payment more manageable. I’m not so sure that in this economic climate, where wages have risen very slowly for the last 5-7 years, this approach makes sense any more. If you lock yourself into a high payment relative to today’s income, that payment may still account for the same percentage of income half a decade from now and you leave yourself virtually no wiggle room for maintenance and repairs.

What would be a better rule to follow? In order to reach longer term goals and give yourself budget flexibility, I’d suggest spending no more than 25% of your income on housing. It’s even better for your long term financial health if that 25% is calculated as a percentage of your take-home pay, not your gross. You’ll have to get creative, learn to live in perhaps a smaller space than you are told you can afford but hey, the “tiny house” movement is picking up momentum and you could be on the cutting edge of a cool new trend!

If there is one common thread among the people I’ve talked to over the last five years who have been in significant credit card debt or under enormous financial pressure, it’s that they spend way too much money (in my view) on housing. As I’m searching for a way to get closer to my kids’ schools and off the Beltway so often, that is going to be a major factor in my home search. You might want to consider it in your next home search too.