As we continue to grow and mature, our living situations may change. Some of us may go from living in college dorms to moving into our first apartment. Others of us may go from sharing apartment space with a roommate to buying a house with our spouse. As we progress through life and make these changes, we must remember that our living arrangements can impact our finances and overall net worth. Here are some things to keep in mind:
1. Be weary of buying a home that’s too big. As someone who relaxes by watching HGTV, I love looking at nice houses. Many of my physician colleagues live in mansions and I marvel every time I walk into their homes. Although it’s perfectly fine to want to purchase a home, think twice before getting one that is too big. Despite how much the bank may lend you, there are lots of other costs associated with buying and up keeping a home that can add up to quite a lot. For example, a larger home usually comes with a higher mortgage payment, higher yearly property taxes, and high insurance costs. These expenses can prevent you from being able to save or invest money at an optimal rate. Plus, a larger home and more space, means that you need to furnish more rooms and purchase more items fill up that space. With more expenses come less savings and less saving/investing can severely impact your ability to increase your net worth.
2. Be weary of an apartment/home that’s too expensive. Similar to not purchasing a home that’s too large, also be careful not to rent an apartment that’s too expensive. In most cities, there are apartment homes that are fairly cheap, reasonably priced, and extremely expensive. Be careful of the later. It can be tempting to rent a place in the middle of the city with the high-rise apartment, scenic views, a rooftop pool and modern amenities but be mindful of cost. I know many people who rent apartments like these which costs them almost 3 times as much as other apartments in the same city and are over twice as much as the average mortgage price in their area.
While it’s okay to “pay for convenience” be mindful that doing so may preclude you from being able to spend money on other things or save the down payment needed to purchase a home, pay off your student loans at a reasonable rate, invest money for retirement, or take the types of vacations you’d enjoy. The general rule of thumb is to not spend more than 30% of your gross (pre-tax) income on housing. While that may be quite challenging for those who live in high-cost-of-living areas like Seattle or New York, it provides a general framework we can use to determine which apartments we should think twice about renting. Although most people sign leases for 1 year, committing to such a huge fixed cost can be a financial catastrophe if our income changes, the coronavirus pandemic has made this even more true.
3. Be weary of a work commute that is too long. Along with the size and cost of our housing, we also need to be mindful of the distance our home is from the places we go to most. Having an affordable place an hour away from our job might save us money in rent but cost us a lot more in gas and car maintenance. It may also take away valuable time we could spend with our families or decrease the time we could spend working on other side projects that could help us bring in even more money. Jonathan Clements’ in his book How To Think About Money, mentions that long work commutes can be one of the main things that actually decrease our overall happiness in life. This suggests that finding housing that is too far away from our jobs can even affect our mental health and well-being.
4. Consider a roommate. Those who are single might want to consider having a roommate. Although this can get a little challenging as we age and begin to want our own space, it is something I urge everyone to think about, especially if they are still young and unmarried. Having a roommate will allow you to split the rent and will cut all of your other housing costs in half. Although having to share an apartment with someone else can be inconvenient at times ask yourself if you this inconvenience is worth saving an extra $500 to $1,000 per month. For me, it is. I’m a resident physician who lives with a roommate.
I share an apartment with one of my co-workers. We each have our own bedrooms and bathrooms but share a common living room and kitchen. Since we both work 60 to 80 hours a week, we are rarely in the apartment at the same time which makes things a lot easier. Plus, sharing this space allows us to split all the bills and saves us each over $1,000 per month. With this extra money I’m saving, I’ve been able to invest a lot more towards retirement, put away cash in an emergency fund, and save money to go on international vacations. Having a roommate is one of the best financial decisions I’ve made as a resident.
5. Consider house-hacking or renting a room. For those who have a spouse or may purchase a home soon, consider house hacking. House hacking is when you rent out part of your house to another person. Typically, this is done when people buy a duplex or a multifamily property with multiple units or apartments. They may live in one of the apartment units on one side of the duplex and rent out the other side. This is more ideal for singles or young couples who prefer their own living space but still want to save some money on the rent or have some additional income coming in on the side. Other people may decide to buy a place that has an extra bedroom and rent out that room during certain times of the year for a few weeks at a time. While this may not be ideal for everyone, it may be a good option for those trying to find ways to decrease their housing costs.
6. Consider a rental property. For those who live in single-family homes with their spouses or who have their own place and love their person space, another option is to consider a rental property. Perhaps there is an affordable home in your city you could purchase, fix up, and rent out to others. Maybe you already have a home but are thinking of purchasing a newer one to have more space for your growing family. Instead of selling it, consider renting it out to someone else. Renting out a home can be a great way to build wealth since it allows you to use the renter’s monthly payment to pay off the mortgage and save a portion of the leftover money for yourself. There are lots of other responsibilities associated with becoming a landlord, but this process may be something to consider.
My point? Our living situations can affect our finances in a number of ways. We should be careful of buying a home that is too large, renting a place that is too expensive, or finding housing that is too far of a commute to our jobs. We should also consider living with a roommate, house hacking a duplex, renting out a room, or purchasing a rental property. Tell me, what living arrangement do you have currently have and how do you think it’s impacting your finances?