Sunday, May 22, 2011

Challenge the "one-third" rule

Once we land ourselves a suitable job, most of us begin to get the itch to shop for homes – not just any home but, more specifically, we tell ourselves we’re looking for “the first home.” The starter kit to get us headed on the right path of adulthood, to set us up to just maybe buy the “dream home” later on.

So we start home shopping on the weekends. We get up, go to Starbucks – a skim latte for him, a half-caff for me – and then we hop into the car together and start touring these open houses like we know what we’re supposed to be looking for. (Granite countertops and oak cabinets? That’s good enough for me!)

And when we start finding homes we like – maybe even a home or two that we love – the next thing we all want to know is: how much can I spend? What’s the most I can comfortably afford for a mortgage?

And the “rule of thumb” response is: one third of your paycheck.

So that’s what many of us do.

And every month, we sign away a third of our earnings to live in the home we chose, and then we only have two-thirds left for food, transportation, debt repayment, new clothes, dry cleaning our clothes, entertainment, the newest issue of our favorite magazine, and savings. 

When did housing become so entitled?
The reality is: when we let it.
Neither physics nor calculus dictated that housing had to cost us a third of our earnings. We did.

When? At the beginning of the 20th Century, when brokers and architects were selling what they called “pattern homes” to the middle class: they would market a book of half a dozen designs for the consumer to choose from, peddling the virtues of home ownership – respectability, social status, and financial comfort. And when they were asked, by the customer, how much they should spend, they astutely responded: "one-third of your earnings."

It was, perhaps, the most they could get away with before putting homeowners into financial hardship. And why wouldn’t they? Over the course of 30 years, you’ll likely pay twice the price of a home in mortgage payments, half of which is actually for your home, and the other half of which goes straight to your bank.

What if, however, we budgeted one-fifth instead of one-third? 20% instead of 33%? And what if the extra 10% was allocated to that savings target we never seem to hit each month? And what if we spent our careers building our own wealth – rather than that of our banks and brokers?

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