Monday, September 26, 2005

How much should you spend on housing?

This article was exactly what I've been thinking about lately. How much of your "lifestyle" should you sacrifice in order to have a nice place to live? People often say you should spend no more than 30% of your gross income on housing. Whenever this is mentioned in discussion of New York housing prices, people always point out that in an expensive market like NYC, many people spend a lot more than 30% on housing. 50% and more is not uncommon.
First of all, I think a flat percentage isn't necessarily the right way to look at it. 30% of $30,000 and 30% of $100,000 leave very different amounts behind to cover all the other basic needs of life, and if you make $30,000 a year, you really shouldn't be paying $10,000 a year for housing, because $20,000 minus taxes, minus food, minus commuting expenses, basic clothing, and even some slight attempt at retirement saving, doesn't leave much.
If I spent 30% of my income on housing, that would be about $2000 a month, more than double what I spend now. It could buy me a 1 bedroom condo in my neighborhood that a broker wanted to show me, a nice place with a brand new kitchen and a terrace which I declined to look at because I didn't think I could afford it. My current budget allows me to save around $5-600 each month not counting my 401k, so I have some room to pay more, but where would I find the other $550 a month? I could cut back on some travel, telephone and food expenses, and stop taking my French lessons, but that is about all the leeway I have and it might not be enough. (Not to mention that there goes half of the pleasures in my life that make me feel like I am not a robotic wage slave!) Then what? Start cutting back on my 401k deductions each month? That just seems like a bad idea, but if you read the article linked above, some people do exactly that.
Hopefully these sacrifices would be temporary, presuming I would get raises over time that would outpace any housing cost increases and allow me to phase some fun and savings back into my life after a few years. When I think about it this way, I wonder if I am being too conservative. Of course you have to make sacrifices to own a home, am I just being a wuss about it? (Keep in mind that this wuss has spent the last 5 years living in a 240 sq ft studio in order to maintain her current lifestyle!) What would you do if you were me???


Anonymous said...

Interesting article.
I pay about 11% of my gross salary towards my monthly housing costs (PITI - principal + interest + taxes + insurance). That's $750/month on a salary of $80k. My house cost $125k in 2000, and is considerably below average for my area. I think the average sale price in my county is around $230k. Owning a less expensive home allows me to save $14k in my 401k, $4k in my Roth IRA, take 2 nice vacations per year, and still have money left over for hobbies and toys, eating out, and doing pretty much whatever I want. I would not want to have to forgo any of those things for a bigger house. There are people at my work who struggle month-to-month to pay for their McMansions, and are literally one paycheck away from foreclosure. I don't understand it at all!

Caitlin said...

I's kind of tough. Your previous point about golden handcuffs really nails have a remarkable rental deal for where you are, which seems to complicate things.

I guess it's just a question of how badly do you want to a) change where you are living and b) OWN your own place... if the answer is pretty much "really really badly" then it should feel more like "choice" than

If it's feeling like sacrifice...well maybe that's a sign that buying right now isn't the way to go. Just a thought.

lpkitten said...

you know, i've never been a huge fan of coupons. mainly because the coupons usually make name brand stuff the same price as the generic brand stuff. generic stuff usually seems like the same exact stuff to me (unless its laundry detergent or coffee) and its way less effort than trying to cut, sort and manage coupons. the only time i would consider using coupons is at stores that honor DOUBLE coupons. :)

Anonymous said...

IMO, that article is quite silly. While there is no denying that current housing prices are making it extremely difficult for 1st timers to buy, it is also quite true that 1st time home ownership has always represented a certain level of hardship.

What the article highlights is that in our culture, many luxuries that were previously only available to the wealthy have become commonplace for the middle class. I probably earn several times as much as most of those people in that article, yet some of those sacrifices they are having to make are luxuries I have never felt I could afford. Pool tables, flying lessons, SUV's, ski vacations, etc. Give me a break. Skiing is so darned expensive, I haven't been in over a decade. My networth is well into the seven-figures. Yet, somehow, I've never been able to bring myself to purchase a brand new car, I don't own a pool table, I attended public schools, okay I took flying lessons 20 yrs ago (but they were free thru my college).

I'm not exactly living a bare bones lifestyle, but I just find it laughable some of the things these people consider to be hardships. When I bought my 1st home, I sweat bullets for quite some time after closing. Laid awake wondering "what if". And each time I have traded up, there is still that big "how am I gonna pay for this" knot in the stomach.

You adjust, you adapt, you shift some priorities around. you get a raise/promotion, you get a new job with a higher salary, etc. After awhile, you somehow adapt. Not unlike having kids - you're never really prepared and you somehow adjust.

It is totally worth it - to be an owner. The intangible benefits are significant. But don't do it until you really really want it.

Anonymous said...

Buying high and sellign low ... I dont get it.

Look at the markets sall now ... people did this to themselves. Buying huge houses they cannot afford is distant bedroom communitys and commuting in the SUV. Gee what a shock the market has tanked and gas has gone up. Now the wage slaves are worse off than ever - thanks to their own dumb choices.

Its a classic setup and people fall for it ever few decades making the rich richer and themselves poor as dirt.