Common financial wisdom tells us to live “within our means.” But is that really good enough or is that cutting it a little too close? What if we chose instead to live “below” our means?
I spoke with Matthew Miglin (a business owner, financial advisor, and Licensed Clinical Pastoral Counselor (LCPC)) about this topic as it pertains to the decision to buy a home.
Based on his experiences, Matthew believes that most people take this life-changing decision more lightly than they should. They often fail to seek out counsel when deciding to take on a debt that takes up most of their income.
I asked him where a young couple should go to find advice about this decision.
He stated that a financial planner or advisor is probably the best option, although sometimes they are motivated by product sales, an incentive that can get in the way of giving sound advice. But a financial advisor can help couples understand the effect that this purchase will have on other aspects of their lives, such as saving for retirement.
Sometimes hiring a fee-based advisor can work better than one who is commission-based, but not everyone believes they can afford that.
One area in which the purchase of a home has a profound effect is in the area of marriage and relationships. Matthew referenced Ed Cole’s book, Communication, Sex and Money, whose premise was that these three things have the greatest impact on a marriage. In fact, Miglin feels that the issue of money, more than anything else, can tear marriages apart.
A big part of the problem lies in different understandings or attitudes, almost always split along gender lines. Very often, men are more conservative and pragmatic, while women tend to view the purchase of a nice home as part of their security, and are usually more liberal and idealistic. When a couple buys a home, one member of the couple almost always has to compromise, which can lead to friction later.
I asked him what percentage of a couple’s income is realistic to spend on a mortgage. Even though it’s limiting, he advises no more than 30%. Anything more than that will not free up money for you to do anything else, including fix up your own house. Miglin cautions that buying “below your means” puts you in a much better position.
Miglin advocates a shift in the way we view our home mortgages. Too many people think about their mortgage only in terms of their monthly payment. But the reality is that the cost of financing can drive up the price to such an extreme that a house worth $250,000 can end up costing its owner a total of $750,000 for a 30-year mortgage. With a 40-year mortgage, that would cost even more.
As an example, Miglin tells the story of he and his wife’s home buying experience.
Although the bank approved them for a $470,000 mortgage, he cautioned his wife that they would actually be buying the house for a total of $1.2 million. If they decided to purchase a $300,000 home, that cost would total $900,000 when the cost of financing was factored in. It was clear that this would not be a good decision!
Instead, Matthew and his wife found a house that was being foreclosed on. It was located in an area an hour north of where they had originally been looking, meaning significantly lower taxes. The prices were lower in that area too; they were able to negotiate the price down to $112,000. They used the extra cash to renovate the home so that it would be worth more. They also chose to get a 30-year mortgage, but paid double/extra payments so that they could reap the same benefits as they would have with a 15-year mortgage. They paid off as much as possible within the first three years.
Miglin cringes when he hears about people who “refinance” their mortgage in order to get a lower monthly payment. Refinancing costs more, because it adds to the length of the loan and results in higher costs in the long run.
I asked Miglin to further define the idea of living “below your means.” What does that mean? How do you determine what your “means” are?
He suggests starting by tracking your expenses, down to every dollar. In his view, this is much more effective than creating a budget. Unless you’re very disciplined, budgets don’t work very well. But the knowledge of how you’re spending your money can help you make better judgments. For example, you may realize that you’re spending $150 a month on coffee, or spending an exorbitant amount on eating out instead of bringing a lunch with you to work. These realizations can help you determine what you are willing to compromise to free up some money for home ownership. Most people are willing and able to make sacrifices to own a home, but for each person, those sacrifices will be unique.
Most people consider the purchase of a home to be a once-in-a-lifetime decision, but the reality is very different. Most people do not stay in one house for an entire lifetime. This misconception can create a vicious cycle for continuing to finance more loans as you move from one home to another.
Lastly, I discussed with Matthew the American concept of the “dream home,” a phrase invented by people that sell houses. American pride says that everyone can own their own home. But owning a “dream home” does not mean the same thing as owning a home that supports your retirement, your marriage, and your health. In our culture, right now, people tend to be drawn in by the aesthetically pleasing aspects of home ownership rather than considering the deeper meaning and value that a home holds for their families.
To sum up, Miglin advises families that want to purchase a home to “count the cost,” and to consider the total cost of home ownership, rather than just the monthly payments. He emphasizes once again to track everything you spend in order to make sound decisions. And you will undoubtedly need to cut back on some things! Homeownership is full of hidden costs (roof repairs, leaky faucets, etc.) that are not factored into the equation when making the initial decision to purchase.
The dream of homeownership is attainable…but only if you are willing to live “below your means.”