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Part Six on Money and Marriage:  Too Much House?

We’ve been looking at Money and Marriage in recent blogs and taking our cues from three books by Dr. Thomas J. Stanley (The Millionaire Next Door, The Millionaire Mind, and Stop Acting Rich). He writes that the biggest single deterrent to wealth building is having too much house! I’m surprised he wrote that. I’d have thought he’d have said, debt or divorce. But in any case, it emphasizes the importance of living within our means.

The reason he singles out the house as a deterrent to wealth building is because with the huge house payment comes higher maintenance costs, plus, as the housing value goes up, taxes go up. But an even bigger factor in draining our money away is the cultural forces at work in your neighborhood. These are subtle forces, but forces nevertheless. The fancier the neighborhood, the more money it takes to live in that neighborhood. You have to drive a certain car, furnish your home with certain furnishings, your kids have to wear certain things and be involved in certain activities that have high costs associated with them, you have to entertain a certain way and landscape a certain way and all of these things add up to sucking the money we do have away to meet expectations we can’t, in the long run, afford to meet.

Witness this startling quote from Dr. Stanley:

The average single family home in America is approximately 2,400 square feet …Statistically the larger one’s home is the less productive its owner becomes in transforming his income into wealth.   And remember that 92% of homeowners are not millionaires.

Only 92%? Where are all these people who supposedly got wealthy owning their own home? They are living beyond their means. We tend to “move up” as far as we can, thinking that housing values will rise continually and leave us with a sizeable nest egg. Ha! That’s an illusion. You can’t just sit on your butt and expect your nest egg that only consists of your house to take you through retirement. As 2007 taught us, rising housing values are not a guarantee.

Buying the nicest possible house on one’s income is a sure way to stay flat (or worse!) financially. You have to tie up so much of your income to keep afloat that there is little left over to invest. Some of us, frankly, are in too nice of homes and neighborhoods. Dr. Stanly writes:

Perhaps you aren’t as wealthy as you should be because you traded much of your current and future income just for the privilege of living in a home in a high-status neighborhood. So even if you’re earning $100,000 a year, you’re not becoming wealthy. What you probably don’t know is that your neighbor in the $300,000 house next to yours bought his house only after he became wealthy. You bought yours in anticipation of becoming wealthy. That day may never come.

Each year you are forced to maximize realized income just to make ends meet. You can’t afford to invest any money. Essentially, you’re at a stalemate. Your high domestic overhead requires full commitment of all your income. You will never become financially independent without purchasing investments that appreciate without income realization. So what’s it going to be? Will you choose a lifetime of high taxes and high-status living, or will you change your address? Allow us to help you in your decision making. Here is another one of our rules:

“If you’re not yet wealthy but want to be someday, never purchase a home that requires a mortgage that is more than twice your household’s total annual realized income.”[1]

What Dr. Stanly means by “total annual realized income” is the amount of money you actually pay taxes on. If you paid taxes on it, it was realized income. Those who end up being wealthy and those who are wealthy have found a way to protect their income from taxes. They save it, for example, in retirement plans. This takes it out of the taxable area. As soon as you spend your money you are taxed on it. Taxes and spending prevent you from accumulating wealth over time.

In Dr. Stanley newest book, Stop Acting Rich he introduces another formula to compute a realistic housing value that will enable you to build wealth over time:

“The value of your home you purchase should be less than three times your household’s total annual realized income”[2]

Here’s an example using the two formulas above:

If you and your spouse’s annual realized income (after tax income) is $100,000, to become wealthy your house should not be worth more than $300,000, or 3 times your annual combined annual realized income.

However, using Dr. Stanley’s formula, you shouldn’t borrow more than twice your annual realized income, or $200,000.

This goes contrary to what your banker will tell you and what they will lend you. According to bankrate.com, the formula your mortgage lender thinks about is that your mortgage shouldn’t be more than 28% of your gross monthly income. That’s before taxes. Dr. Stanley says, do the math AFTER taxes.

If your annual realized income (after taxes) is $100,000, your before taxes income will be around $120,000, depending upon your deductions. So the bank would figure it this way:

$120,000 divided by 12 = 10,000 a month. 28% of 10,000 is 2800.00 per month. This would mean the bank would let you borrow up to 520,000, which would equal a $2791 payment per month at 5%. If you got a lower 4% mortgage, you could borrow up to 580,000!

But using Dr. Stanley’s formula, if your annual realized income is $100,000 and you don’t borrow more than twice that, a 30 year mortgage on 200,000 at 5% is 1073.64 a month or only 12.9% of a monthly 8,333.33 income! At 15 years your payment at 5% would be 1581.59 or 19% of your monthly income.

Dr. Stanley’s formula for having a mortgage that allows you to have enough money left over to save is even more conservative than Dave Ramsey’s plan. Dave Ramsey is noted for helping people get out of debt and to build financial independence. He suggests never taking out a mortgage that is more than 25% of your monthly take home and that you can pay off in 15 years.

Whether you use Dr. Stanley’s formula or Dave Ramsey’s, many of us have purchased homes that will prevent us from building wealth. Dr. Stanley says that in order to build wealth for your future you need to save 15% of your income. There is NO WAY you can do that and be paying 28% of your income to mortgage payments, plus all of your student loans, car payments, credit card payments, condominium fees, alimony and child support payments, real estate taxes, upkeep on the house, utilities and keeping up with your neighbors!

You’ll just be working to pay bills. And you will wake up someday and you’ll be broke and have nothing to show for all your hard work.

What, then, does Dr. Stanley recommend? He writes you should live in a home that is in a neighborhood where most people are living on 80% of your annual realized income. That way, you can comfortably live similarly to your neighbors and still have enough income left over to save. Or as Dr. Stanly writes:

Then live and consume as though your household’s income was only actually 80% of what it actually generates. Save and invest the rest. Now you are on your way to becoming wealthy.[3]

As we’ve noted before, the key way to having wealth is to live below your means. Dr. Stanley, then suggests the easiest way to live below your means is to live in a neighborhood that is BELOW your ability so you can save.

This is the complete opposite of the pressure we hear in our society to climb the socioeconomic ladder as far as you can. We buy these fancy homes, in anticipation of future earnings, only to end up in a perpetual state of being broke.

If there’s nothing left at the end of the month, you won’t have anything left at the end of your life.

YIKES! Lord, save me from lust and greed and envy!

So…is your house preventing you from building the kind of wealth you and your spouse need to prepare for your future?

This may be a discussion the two of you should have.

[1] Stanley, Thomas J. (2000). The Millionaire Mind. New York: Andrews McMeel Publishing, p. 68.

[2] Stanley, Thomas J. (2009). Stop Acting Rich. Hoboken, New Jersey: John Wiley & Sons, Inc., p. 27.

[3] SAR, p. 26.

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