In my last post, I wrote about the four overarching categories that have an impact on how much money you are able to save and pay down debt. The categories are housing costs, transportation costs, food costs and discretionary spending. This post will focus on the one category that typically consumes the largest portion of most people’s income—housing cost. Within the housing category the following cost are usually considered:
- Rent/Mortgage Payment
- Property Taxes
- Maintenance and Repair
Below I will break down each of the categories and outline possible area where you should and should not capture savings.
Until recently the recommended maximum amount of one’s mortgage payment was 35% of their gross income. When Mrs. Broke Architect and I bought our house in 2008, we were told by our real estate agent that we were approved for a mortgage that was 35% of our gross income. The problem with the approval amount was that it worked out to be more than half of our after-tax income. If we had maxed out the amount we borrowed, I am fairly confident we would have found ourselves being foreclosed on. Sadly, the 35% standard was a government recommendation that was adopted by corporate American. If Mrs. Broke Architect and I had depended on the government and corporations to look out for our best interest, as many Americans do, we would have ended up as a negative static. When it comes to your financial well-being, be sure to do your own math. As I always say no one will care about your finances than you.
After the financial crisis, corporations adopted a new recommended standard—28%-30% of gross income. Although I like the concept of lower numbers, they should use numbers that are based on ones after tax income. Very few if anyone I know lives on the pretax, so using gross income as an indicator as one’s ability to make payments is a bad idea. So, once you get your number from you real estate agent remember this:
- The more money you pay for the home the more money the real estate agent makes. They have a vested interest in getting you to spend more money.
- Run your own numbers based on your take home income. Factor in such cost as utilities, home maintenance and any payments for new furnishings.
- At this point in the home buying process you have the most control. You do not have to spend the full amount you have been approved for. Mrs. Broke Architect and I instructed our real estate agent not to show us homes above a certain price point. If you control how much you spend at this point in the process you could be setting yourself up to save hundreds of thousands of dollars.
In this era of cash being cheap and putting as small of a down payment as possible, people are not considering paying points or larger than required down payments. I always hear people say their money can make more in interest in the market rather than tying it up in a mortgage. The problems I have with this statement are:
- Less than half of all Americans own stock, 47% to be exact. 61% of all Americans say they cannot cover a $1,000 emergency expense. My issue here ties into my first statement. If American’s were saving the money they did not put into their mortgage, they would have funds to cover a $1,000 emergency expense without relying on a credit card. Insurance
For many of you, your homeowner’s insurance is included in your mortgage payment. So, most people set it up when they take out a mortgage and never revisit it again. It’s the set it and forget it mentality. One of the first ways to save money on insurance is to bundle your various policies under one company. Insurance companies give policy owners discounts for a not only bundling your home and auto insurance, but some also give discount for monitored security system, doing home improvements regarding safety features, and the amount of time you have held the policy
Now before you just take the first policy the insurance company offers you, review a few key items in the policy:
- Confirm that the replace/rebuild amount the insurance company is offing will be adequate to replace you home in case the need arises.
- Mrs. Broke Architect and I walked away from several insurance companies that refused to provide the replace/rebuild amount we specified.
- Confirm the amount of the deductible. Most of the people I know keep the deductible as low as possible, they never explore the reduced premium amount for have a higher deductible. Seeing that Mrs. Broke Architect and I have a six-month emergency fund, so we always explore this option.
Like insurance, most people pay their property taxes with their mortgage. Saving money in this category is tough. How the government appraises your property is somewhat beyond your control. Always review your tax bill to ensure your local government is appraising your property correctly. The other option is to buy a home in an area were the property taxes are lower.
Maintenance and Repair
Unfortunately, most people have a problem with saving money in this category; I would dare say that most people do not fund this category. And let’s be honest, repairs and maintenance are not the sexiest items of the home ownership list. No one wants to pay to repair/replace a roof, but they will gladly install a new tile backsplash. The other option many people exercise in regards, to home maintenance and repairs is the just buy another home.
Currently, we are led to believe that the first house we buy is a starter home and our goal should be to live in it for 3 years or so and then upgrade to the next level house. The typical the average American buys between 3 to 5 homes in their lifetime. This can lead to a lifetime of mortgage payments, including making payments during one’s retirement years. The typical home buying scenario goes like this:
- 1st home (starter home)
- 2nd home (upgrade home)
- 3rd home (dream home)
- 4th home (downsize home)
This strangely ties into the maintenance and repairs category because lots of people sell their homes in an effort to avoid having to do it. But during the process of preparing their home to sell, the real estate agent often requests that the homeowner not only do repairs, but also do some renovate work. Being an architect, I have had more than one client who has hired me to design their renovation with the hopes of increasing the sell ability of their home.
Some of you may take issue with the idea of placing maintenance, repairs and utilities cost in the housing cost category, but the reality is the cost of these items are a direct result of size and quality of the home you purchase. If you buy an older home, you will most likely pay higher maintenance and utility costs. Older homes by default are leaky, drafty and less efficient than most newer homes. Over time energy efficiently standards and code requirements are increased in a effort to improve construction standards, reduce health and safety concerns and lower energy use. Also, larger homes typically cost more to heat and cool and it will require the use of more electricity, which means there will be more out of pocket cost for having the privilege of living in that more spacious home.
Beyond buying a smaller, more efficient home, the other options for saving money in this category are:
- Some of you live in areas where you have a choice of utility companies to choose from. The added market place competition should lead to lower utility cost
- Caulking and installing spray foam installation around all exterior wall and roof penetrations and openings such as electrical switches and outlets, windows, doors, and skylights
- Installing more wall and roof insulation
- Insulating all water piping
- Installing energy efficient insulated doors and dual pane low-e windows
- Trying to get off the grid:
- Installing solar panels system on your home is probably the most popular options that fall under getting off the gird. The average return on investment for these systems usually take from 6 – 8 years, not including any government tax benefits you may claim for installing the system. If you are interested in this type of system, you should first ensure that the site that your home sits on receives an adequate amount of sunlight to make the invest worth the cost.
- Installing a geothermal system. A geothermal system uses the heat storage ability of the earth and/or the earth’s ground water to heat and cool your home. These systems lower cost by increasing e and or decreasing the temperature of water being used by the systems in your home. For example, let’s look a hot water tank being used in the winter season in northeast America. The temperature of the cold water going into the tank may be 45 to 50 degrees. If you have the tank set to provide hot water at 110 degrees, the tank will have to heat the water up 60 to 65 degrees. If a geothermal system was used with the same hot water tank, the cold water would be pumped down into the earth which would heat the water up to 65 degrees than sent to the hot water tank. If the tank was set to the same 110 degrees, the water the tank will have to heat the water up 40 to 45 degrees. The return on investments for these systems is typically is 2 to 10 years depending on several factors. Additionally, a geothermal system is typically tied to your HVAC system to where is gains the efficiency.
I hope this information helps you all to weigh your options and cut costs wherever needed. Let me know if you have some options I gave not considered.
Remember, no one will care about your money more than you, not even your financial advisor.
The Broke Architect