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November 16, 2009


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One other thing to add: START INVESTING EARLY! Compound interest needs time to work, and even a single year makes a big difference. That's true even if you don't start with the best investments right away.

If you are unsure what to do, start with a conservative investment today and research a better plan. That beats waiting to start until you have a great plan.

-Rick Francis

The book didn't tell people what kind of house to buy, onlyy where to live.

I've lived in 25th percentile neighborhoods (mostly) and 75th percentile neighborhoods, didn't make a bit of difference in my net worth.

FMF, in regards to your point #3, if you take into account both bits of advice, you would only need to put 1/3 downpayment if you are actually purchasing a home exactly 3 times your "annual realized income". The cheaper the house, the less downpayment the author seems to think is required. At least, that's how I understood it.

I literally laughed out loud at FMF's points #1 and #4 since that is exactly what I thought when I started reading! I even have specific readers in mind... :)

Our house value was 1.5 times our household income and the mortgage was 1.2 times our household income.

When we bought our house a few years ago, I had not yet heard of any rules of thumb for home purchases other than we needed to put at least 20% down...that determined our maximum purchase price of $140,000.

I only discovered the world of personal financial blogs about 4 months ago...I had no idea I was missing out on so many tips!

If I were to take the author literally, I could become wealthy by living in a Third World country.

No thanks!

No thanks! is a perfectly fine response, because we use our resources to make ourselves happy-they have no other function, but having a high paying job in a third world country is a great way to become wealthy. A short term sacrifice can have long term payoffs.

We bought a house right at 3x income, and the mortgage was 2.5x income, but within 2 years we became a 2 income family, and now the house is worth 1.75x income, and the mortgage is 1.25x income.

For those on the coasts, renting is clearly the best option (from a purely financial perspective) for most people.

to become wealthy i have set out very simple rule; increase my financial education as aggressively as i can, save and invest as much of my monthly income as is possible while at the same time being frugal. i reckon that if i do this for the next twenty years, i am going to be filthy stinking wealthy. I think that i will comment or speculate on the house issue because i am a renter and will probably remain one for quite some time

StL - That really does sound like a great way to become wealthy, for those who can get a high-paying job.

AQND FWIW, I don't hate this post, I'm pretty much indifferent to it, as I personally find it irrelevant.

I think like everything else, you might have to adjust things for your area. If you want to live in a high-cost of living area, then you might have to cut down on other things to still become wealthy. I live on the east coast and while my condo isn't that expensive now, I'll probably need a bigger place in a couple years because of an expanding family. If that means I take fewer vacations or don't eat out as much, that's a sacrifice I'll make to be able to afford more than the above rules would otherwise suggest.

I think those rules are a good rule of thumb. If people aren't willing to cut back in other areas then they probably need to follow the rules more closely.

I'm all about being efficient with my money, spending it where I deem it to have the most value. If that's spending more on a house than on a vacation or entertainment, that's ok as long as it's a conscious choice. It's when people don't think that's the problem IMO.

Sorry for the long-winded response. I enjoy talking about this stuff.

Really, the advice seems to be: don't try to keep up with people at your income level. Instead, try to live like people a couple income levels below you, and invest the difference. (Buying a house just happens to be one of the largest financial commitments most people will make, so buying a house like someone a couple income levels below you is a big part of that.)

That's really been true for my wife and I. Most of her coworkers bought expensive houses ($350k+) in our high-cost-of-living city, and some of them are upside down. Most of them drive fairly nice cars ($40k+). Meanwhile, we rent a nice two-bedroom apartment that's a short (7 minute) drive from work, drive paid-off Aveos, and save/invest over 60% of our income. Instead of trying to match her high-paid engineer coworkers' lifestyles, we've matched my low-paid nonprofit teacher coworkers' lifestyles, and in four years we've saved up enough to be able to pay cash for the house we want in the city we want.

No argument from me. Our house first mortgage was just under 2X our income. Moved into a new cul-de-sac so all houses were +/- 10% of each other once they were finished. Turns out we drive the cheapest cars on the block, but that doesn't bother us.
The advice from Dr Stanley is excellent.

FYI, you do not live in a high-cost-of-living city if you can buy a house for $350,000. Not. At. All.

@ Brooklyn Money. I live in NYC too and I don't think I can agree more. I've been playing with the thought of moving to a less expensive city, but in the end it's a struggle between what my heart tells me to do (stay in NYC) and what makes financial sense (move out). Not sure yet which one will prevail, especially when I've been exploring money-making ventures that would be extremely hard to replicate in a smaller/less busy city

Brooklyn Money and Investing 101 --

Thanks for not letting me down (see point #4 above.)

I think FMF post these articles occasionally to make himself feel better about living in Michigan. :)

I own a vacation home outside Traverse City but I'm a big city kind of guy so I live in Chicago. As much as I love visiting, I wouldn't trade living in Chicago, or any other big city, for anything. I've made my amends with the financial ramifications and so far I've been very content with the trade off.

I couldn't agree more with your point, FMF. I want to flee my over-priced city. However, the poster who claimed that they live in a high price area and can buy a house for $350 does not live in a high price area.

350K is a high priced home. It may not be a ridiculously nutty high price, but it is a high price home.

One area where the cost of living thing can be advantageous is if your employer offers a housing allowance based on the cost of an area. Use the boss' money for years to build up equity and then retire to a normal area and you'll be able to afford more home for less. We lived in Virginia Beach for 15 years and sold our home when I retired and moved to Ohio. Ended up getting twice the home and twice the land for less than what we sold the Virginia Beach house. I will admit it is a longer drive to the beach now and I had to buy a snow shovel. :-)

Regardless of location, people need to respect the importance to their total financial health that their home plays. Don't buy what you can't afford. And if you're not sure then you're stretching yourself thin. Too often people allow themselves to buy the most expensive place they can possibly afford and then they are in trouble with the first unexpected expense. Guess what? Hot water heaters go bad, tires go flat, things break, if you can't financially handle a surprise expense you're not ready to be a home owner yet.

350K might not be high-priced for Brooklyn, but it is high-priced overall (and keep in mind I said 350K+, as in, 350K is the cheap end; many are in homes in the 500-700K range.) You can buy a decent house in most largeish cities between the coasts for well under 200K, so from my perspective, 350K and up is definitely expensive. And housing isn't the only cost to consider.

According to my city (Seattle) is actually MORE expensive to live in than Brooklyn (by a small margin). Other COLI calculators confirm this -- Seattle is not the highest cost of living place in the US, but it's up there.

Anyway, point is, many of my wife's coworkers are maintaining a lifestyle that requires the majority of their income to maintain, while she and I are living comfortably on a fraction of that income and putting the rest into investments.

Where I live in Silicon Valley there isn't a home anywhere at all that is available for $350K, the same holds true for all the cities between here and San Francisco and beyond to the North and to Monterey in the South.
In my case I bought our first home brand new in 1963 in a nice tract for $26,950 - 3.0 x Salary.
In 1977 I sold it ,added $17,500 of new money and upgraded to a far superior home in the best custom development in the city.
Now in 2009, 46 years later, my total investment in housing of $44,450 has turned into home that is currently appraised at $1,100,000.

That might sound like a great investment but $44,450 invested for 46 years at 7.23% compound interest will grow to be approx. $1.1M. What makes it really great however is that you have had a nice home to live in for 46 years. Of course homes have to be supported, there's property taxes, homeowner's insurance, utilities, maintenance and improvements - together they add up to a lot of money. Renting on the other end is such a pathetic investment for so many obvious reasons that I won't bother to list them.

We rented from 1957 to 1963 in Toronto, Canada, Denver, Colorado, and Silicon Valley until I felt secure enough in my job to take on a conventional 25 year loan at 4.5%. Even back then, when you're young, have kids, and little job experience you need a good sized emergency fund just in case you have to relocate to another state. In the current economy and job situation it's far more precarious that in my time when jobs were at least available if you were prepared to move.

In my hurricane prone area, I recommend that people own as little of thier house as possible. As we learned from previous hurricanes, homeowners insurance companies flee and won't pay out when a natural disaster hits your house. So by owning 1/3 of your house or more, you are out that money when a hurricane hits. Its better to own nothing.

On another note, if you live in a high cost of living area, buy a high priced house (lets say $800,000), but make $150,000 due to the fact that you live in a high cost area, you will be better off than the person living in a low cost area, buying a $240,000 house which is the same square feet as above, but making $80,000 doing the same job. Why? Your retirement will be based on the higher salary. You can always choose to move from the higher cost area to the lower cost area after you retire. But it is difficult to move from the lower cost area to the higher cost area. This is speaking from experience where I moved from NYC to Tennesee after retirement and am living like royalty. Naysayers will tell you that you are doing things wrong because you are spending too much on housing. Don't listen to them. Trust me. I sold my NYC condo and bought a house in Tennessee with cash and still had $400,000 to spare, along with a over double the retirement income than if I would have chose to work in the lower cost of living area earlier. Of course, this goes against the teachings of this website, but it is hands down the better way to go.

As a rule of thumb, the one about housing isn't bad. However, blindly following "rules of thumb" is not the best plan. Instead, you should think through every decision carefully and take into consideration all the factors of your current situation/city.

I've lived in both high-cost (Seattle) and low-cost (Midwest) areas. While it is true that the cost of living and housing is less in the Midwest, living in a low-cost area compared to a high-cost area has many downsides that add significantly to expenses:

You'll be paid lower for what you do, you'll have less flexibility and ability to change your job/workplace because there won't be that many/any other places that can employ you without your having to move out of the area, it will be harder/take longer to sell your (admittedly low-cost) home because there are many fewer buyers of any sort, your home will not appreciate much or at all in price even in a good economy (no population pressure or land limitations to drive up prices on existing houses), public schools will be underfunded due to a poor tax base and there aren't many different public school options to choose from (ie no charter schools), public school boards are more likely to be ruled by conservative fringe groups focused on preventing the teaching of sex ed and evolution, the only available private schools are religious, public transit is very limited so you'll have to drive everywhere you (and your teenaged children) have to go, you'll pay more for plane tickets every time you want to fly somewhere else, and you'll want to/have to vacation far, far away because there isn't much to do within 400 miles of home.

Whereas Seattle has a thriving economy with jobs available in many areas, multiple universities in the same city, free music and art festivals, free nights at world-class art museums, university and public libraries, beautiful public city parks and many outdoor recreation areas very nearby that can be used for free, and the city is compact and walkable and there's low-cost public transit with comprehensive coverage of the city + multiple suburbs.

Seattle is great unless you enjoy living in the Midwest. Are you justifying the expense of living in Seattle or just taking an opportunity to bad mouth the Midwest?

I've visited both and they each were great in their own way. In fact, I have yet visited or lived in a city or country that didn't have something about it that was amazing.

In Kansas, we stayed at a family house by a huge lake. We went kayaking, swimming, and water skiing during the day. At night we had bonfires and caught fireflies. We had midnight treasure hunts, could see more constellations than I ever had in my life, and went hiking after breakfast.

In Seattle, we walked to the coolest fish market ever. We also bought souvenirs at an outdoor market that was close by. Then we hopped back into our rental car and drove into the mountains to see the most beautiful creeks running through snow and had my first snowball fight. We spent the rest of the week at a bed and breakfast on Orca Island and touring the San Juan Islands in general.

In Houston, TX we have awesome museums and shows. We have fantastic restaurants. The public libraries and their online systems are amazing. I've met a ton of friendly people and we've made close friends. I hike through Sam Houston National Park with my grandparents when they feel up to it. My husband and I can drive to Galveston to see a sunset or take off on a Caribbean cruise.

In Holland, the people were very friendly. We still had a milkman who would deliver the milk, eggs, Vla (like pudding), and beer. I fell in love with a black currant soda called Cassis. They had outdoor markets in our little city (Vorschoten) every Friday. I could buy freshly baked bread from private bakeries that were walking distance from our house. They had bus systems you would actually want to use and ways to bike anywhere you needed to without getting run over.

In Argentina I walked with penguins at Punto Tombo. We bought tickets on a catamaran and saw Right Whales up close and personal. We took a half day horseback ride on the beaches of Ushuaia and could see glaciers in the distance. We rented a cabin on a mountain for a fraction of what that would cost here and saw wildlife I would have only gotten to see on the Discovery channel. In our city of Bahia Blanca, I could walk to bakeries, grocery stores, fresh fruit markets, and fresh Italian noodle shops. The neighborhood kids made sure to teach me all the bad words in Spanish right off the back, but then took the time to teach me as much of their language as they could...Castellano, a mix of Spanish and Italian that leaves my Mexican grandmother (my step-dad's mom) shaking her head at me and trying to get rid of my lisp.

Yes, every one of these places had downsides too. It rained the whole time while we were in Seattle, I don't know how the education system is in Kansas, Houston gets hurricans, Holland smelled weird, and there were annual sand storms in Bahia Blanca. But why would you bad mouth a whole region and only tell the benefits of one city?

MonkeyMonk --

1. I think you have the right perspective -- realizing it's more expensive to live there and yet making that choice because that's what you prefer. Nothing wrong with that IMO. It's the people who make the choice and then try to justify it as "really being a better deal" that tend to irk me.

2. Michigan is starting to grow on me. After 10 years here, I can finally say that without puking. ;-)

3. Do you need a Michigan-based buddy to watch your vacation home for you some weekends each summer? ;-)

You state the facts very well. I have had friends that moved to Seattle upon retirement because they could get a lot more home and land for the money and pocket the difference to help fund their retirement, plus the Seattle area is a very nice place to live.

Here it's nice to have two international airports very close at hand, as well as excellent schools. The schools with the highest test scores are in the school districts in the areas with the highest real estate values and greatest desirabilities. Also, high real estate areas have far less criminal activity than low real estate areas. We have four excellent junior colleges and three major universities within a 10 mile radius, good freeways, expressways, and public transportation, and many places for art and music lovers of all types. It isn't a coincidence that high real estate values go hand and hand with many advantages over the lowest real estate areas of the country.

Yesterday our "Hike for Health" class made the short chartered bus ride to a beautiful 13,300 acre park in the East Bay, it was formerly a Spanish land grant that was obtained by California when it achieved statehood in 1850. It was a beautiful day, the land was rugged and beautiful, covered in stately oak trees and apart from some cattle grazing and a few horse riders we had it to ourselves and even though we were minutes away from some large cities there were no signs of human habitation until we had climbed to the top of Briones Peak.

As a general rule I think you get what you pay for with real estate since just like everything else the price is governed by supply and demand.

Old Limey -

Back in 1997, I saw on the Web a Bay Area home listed at $122,222 (that was conveniently easy to remember).

The photo was taken (intentionally no doubt) at an odd angle and it was hard to make out exactly what was on offer, but it looked a lot like a glorified shack.

I'm guessing that if it stands today, it can't be worth at least $350K.

ALL consumption works against you. REgardless of income, you must consume less, save/invest more and typically - do it for years! I RENTED modest toenhome/houses till age 48 (!) because reality told me (after ALL expenses, costs, market drops, taxes, etc., etc.,) it was cheaper. Worked hard and long. Drove cheap cars, rarely ate out, never drank $3 coffee frrom a paper cup. If you don't UNDERCONSUME regardless of income (seems the high paid forget this and really aren't rich) you'll never be ther! Thus, I retired in my LATE 40's w/ almost $3M liquid. Now I purchased a modest, new townhome in a relatively modest cost area (WA state)but, still drive a 7 yo car w/ just 40K miles cuz I didnt ever waste $$ commuting or driving to the malls!

I have a pretty simple look-see to gauge real wealth based on age/income: if in a middle class to upper middle class neighborhood that typically has houses WORTH the money paid, I look for... "cars in the driveway vice the garage". Folks who have garages full of "stuff" (no room for two or even ONE car!) even in nice 2-3-4 bedroom houses are "hyperconsumers" and probably have an "under" net worth for their income/ages. Those that have room for the cars and less "stuff" are usually "over" net worth for their incomes/ages, more organized, track their $$ and thus, don't over spend and save/invest more....So far I've found this to be VERY accurate BTW! Walk some neighborhoods and see...

Wow, interesting discussion with lots of different perspectives. I rent because I can't stomach the cost to buy a 2-bedroom apt. in a decent area (I would bet that certain low income neighborhoods in Brooklyn skew our average below Seattle)

Garage-Guided Net Worth...I like it :)

Sadly, I can't back it up. Some people can be organized in one way and disorganized in others. My parents are very organized savers and have a solid net worth they retired on, but their garage is horrid! It hasn't seen a car in 15+ years. My husband's parents are bigger spenders, but their garage is spotless and used only for cars and hobbies. His mother is a more organized person than my mother but defnitely not as frugal...

My husband and I have a solid net worth for 26 year olds (120k) and it's increasing every month. We can fit our cars in the garage, but I haven't cleaned it since we moved in 2 1/2 years ago. It continues to accumulate our junk along the walls. We just made sure we parked in the garage while we unpacked so that we couldn't turn it into storage space. Otherwise, it would look just like my parents. I'm organized at work and when it comes to our money, but we are both disorganized when we get home.

I didn't say it was 100% but, (much) more often right than not after years of asking/meeting my clients, I was right! Stuff = consumption!

Stuff definitely equals consumption. I really do like the theory, if for no other reason than it makes me look good(ish) since our cars do fit in our garage. Plus, I now have "Garage-Guided Net Worth" stuck in my head...

Nice observation that people don't like to be point what house they must buy. This is something that really happens. Here in our office, we face the same situation frequently

This article hit home with me. Back in 2007, I was making $31,000 per year and paying $13,656 per year just in Child Support. After paying 15.3% in self employment taxes, I was left with $12,601.00 per year to live off of (not counting the costs I incurred to operating my small business). That equates to $1,050 per month. The cheapest rent I could find was $500 per month which left me with $550 per month for food, clothing, forget about insurance lol, and capital I needed to operate my business. Not very much.

I was sick and tired of being sick and tired. With the future not looking to improve my financial circumstances, I decided to investigate how to make extra money in something that doesn't require a large amount of capital and that anyone can do and everyone has access to. With a GED level education (I quit), I found the answered for me was the stock market.

Then, I researched who it was that was making all the money in the stock market and how exactly were they doing it. I found the answer to be a small group of investors called Value Investors. Warren Buffett was a name that stood out for obvious reasons. I then set out to purchase every book written in regards to this Warren Buffett. Most of the first books I purchased I payed on average $5 for "like new" condition on Amazon. The very first book entitled "buffetology", I found Brand New for a whopping $2.00. It was the best investment I ever made.

I decided to hunker down and make sacrifices. No more McDonald's, no more new clothes, no more nothin'. I came to the conclusion that to make any change, it would have to be significant or I'd be wasting my time. I decided to save 20% of my disposable income (A whopping $110 per month).

To shortin' this story up a bit, It is now 2 years later and I have over $30,000 in the bank. I went from $0 to $30,000 in almost exactly 2 years. Folks, it can be done you just have to want it bad enough.

Here at our company it really happens frequently. Nice post!

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