I lived in California for many years where home prices could easily top $1 million dollars — that even could be for a small fixer upper. Can you believe that.
The unfortunate thing is that even though compensation is increased in California compared to the same role in other parts of the united states its not relative. In other words, compensation does not increase at the same rate as the cost of living — including buying or renting a home. The high housing prices forced people to spend more of their income on housing and less on other things — like savings.
Keeping Up With The Jonses
I saw a unique situation where some folks saw their homes dramatically increase in value creating a great deal of wealth on paper. One of my neighbors actually took out a home equity line of credit, bought a boat, a few nice expensive cars, etc…. (instead of saving that money). A equity home line of credit is still a loan that you have to pay back — you’re just using your home’s value as collateral. A gotcha here is also that retirees end up having to depend on the money in their home for retirement — this home equity disappears if you take a loan out on it.
Home Cost Really Has an Impact
A recent article published on Business Insider, regarding the primary driver of people’s wealth discusses where you live as a primary if not number 1 driver of your wealth. This article was based on research done on 600 millionaires (a millionaire would be someone who’s combined assets are 1 million — including home value, stock, savings, value of car and other assets, etc). Though we can all have a great deal to learn from this article. The article discusses two key things:
- Wealthy people didn’t buy expensive homes
- Wealthy people didn’t try to keep up with the Jones
Wealthy People Didn’t Buy Expensive Homes
The article discusses how these people who are building wealth, lived in an “affordable home”. An affordable home is one that was worth 3.4 times their income or less. They may have even bought it at a much lower value. Housing affordability varies on a variety of factors such as age, location, income, etc. But the standard amount that you can typically afford annually for a home mortgage is 30% of your pre-tax income. But the lower you go, the better off you’ll be …. Maybe you can do it for less and save the difference?
Wealthy People Didn’t Keep Up With The Jones
These people aren’t buying the expensive cars — nor are being influenced by their neighbors.
Now maybe this isn’t truly the #1 driver of wealth, but its a great thing to keep in mind as you focus on saving money, and reduce your unneeded spend.
Given your home can be such a demand on your income — having a smaller mortgage, smaller home to heat, smaller area to fix — will allow you to pocket the rest of the money for future savings. All the money you save should be placed into investments and the best savings accounts.