Spending: The House Drives Everything
LFG Marketing | May 2019
A fundamental principle of personal finance: The more you spend, the less you have to save and invest.
A unique financial insight: One of the biggest determiners of how much you spend is the size of your home and the neighborhood in which it is located.
When you buy a home, you also buy the lifestyle standards that prevail in its neighborhood. This inevitably exerts a strong influence on all other spending: the type of car you drive, the clothes you wear, the extra-curricular activities of your kids, everything. In an homage to the real estate maxim of “location, location, location,” personal finance columnist Jarred Dillian puts it succinctly:
“The house drives everything. The house drives everything. The house drives everything.”
This insight isn’t new. Here’s an excerpt from the Millionaire Next Door, a 1996 bestseller by Thomas Stanley and William Danko that chronicled the defining behaviors and lifestyles of American millionaires, particularly those identified as Prodigious Accumulators of Wealth:
Nothing has a greater impact on your wealth and your consumption than your choices of house and neighborhood. If you live in a high-price home in an exclusive community, you will spend more than you should and your ability to save and build wealth will be compromised…. [P]eople who live in million-dollar homes are not millionaires. They may be high-income producers but, by trying to emulate glittering rich millionaires, they are living a treadmill existence.
Two decades later, Stanley’s daughter, Sarah Stanley Fallaw, coauthored The Next Millionaire Next Door: Enduring Strategies for Building Wealth, in which she surveyed more than 600 millionaires in America. Fallaw wrote:
“The key to wealth building is to live in a home that one can easily afford.”
These general statements are exemplified by an interesting personal anecdote: Legendary investor Warren Buffett still lives in the Omaha, Nebraska home he bought in 1958 for $31,000 (approximately $267,000 in today's dollars). Buffett’s net worth is currently estimated at $82 billion, making him the third-richest person in the world; his home represents one thousandth of one percent (.001%) of his net worth.
There are two counter-arguments that might convince you to ignore the connection between your home and spending. The first, and probably most compelling, is the benefits it may offer your children. A bigger house in a better community often means greater safety, better schools, and more opportunities for your kids. That’s a premium many parents are willing to pay. And you might be able to justify any negative impact on your saving if you think you’ll eventually recoup the money when you sell. Because another real-estate adage says “Buy a little bit more than you can afford right now – you’ll grow into it.”
Okay. Maybe. Except…
A regular perusal of the Wall Street Journal’s Friday “Real Estate” section usually features sales involving mammoth homes in exclusive neighborhoods, that were either bought or sold at a discount. As investments, many are breathtaking money pits; costly to renovate and maintain, and often sold at a loss.
And a March 21, 2019, WSJ article (“A Growing Problem in Real Estate: Too Many Too Big Houses”) notes this isn’t just a characteristic of multi-million-dollar properties in ultra-affluent neighborhoods. Homeowners in McMansion subdivisions built two decades ago are finding the market for their large homes aren’t what they anticipated:
Many baby boomers poured millions into these spacious homes, planning to live out their golden years in houses with all the bells and whistles.
Now, many boomers are discovering that these large, high-maintenance houses no longer fit their needs as they grow older, but younger people aren’t buying them.
To Save More, Downsize
It might sound radical, but if you’re in your 50s and 60s and behind in retirement accumulation, Dillian says you should downsize now, rather than wait until retirement. Because one of the easiest ways to save more is by spending less. And when it comes to spending, remember: the house drives everything.
Even in retirement, your spending is connected to your residence. The larger your home, the nicer the neighborhood, the more retirement income you’ll need. Why? Because the house drives everything.
Lifetime Financial Growth, LLC is an Agency of The Guardian Life Insurance Company of America® (Guardian), New York, NY. Securities products and advisory services offered through Park Avenue Securities LLC (PAS), member FINRA, SIPC. OSJ: 244 Blvd of the Allies, Pittsburgh, PA 15222 (412) 391-6700. PAS is an indirect, wholly-owned subsidiary of Guardian. This firm is not an affiliate or subsidiary of PAS. 2019-78967 EXP 4/2021
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