As I sat in my home office this morning the book, “The Millionaire Next Door” stood out prominently on my wood bookshelf. The book stands out because it’s a classic in the personal finance world and can be easily understood by everyone. I often re-read chapters of the book and can really identify with most of the content in the 1996 book – see the The Simple Dollar for a nice review of the book.
One of the key principles in the book centers on living below your means (regardless of income level, profession, or status); specifically, the author talks about how most closet millionaires live in modest homes in solid, but not ritzy, neighborhoods. The principle got me thinking about how important it is, especially for a young couple, to purchase the correct home (and start a financial life on the right foot). By correct I mean a home that is the right size, in the right neighborhood, and the right price point.
Most often, super competitive couples strive to purchase a home in a town/community that has a reputation for great schools (in fact, school reputation probably drives home values more than any other factor outside the general economic state of a given region). And while there is nothing inherently wrong with looking for homes in a community with good schools there is usually a premium to get into the neighborhood / district. Often a couple will stretch themselves financially to buy a home in a ritzy neighborhood and thus they begin a kind of financial whirlwind. The couple will next need to buy the right car and the right accessories for the neighborhood (Land Rover and Polo shirts) and will also need to keep the aesthetics of the home in the right balance (green, highly fertilized, grass and slate patios). You can continue to add to the list and see that all of a sudden the couple is living way beyond their means.
So, what’s a young couple to do in terms of figuring out how to buy the correct home? Well, here are some quick tips that may help:
1. Figure out a budget. The old rule is that your monthly mortgage bill (including property taxes and insurance) should not be more than 18-20 percent of your take home pay. I know this is going to sound extreme to some people, but you should be doing more with your money than simply paying your mortgage each month.
2. Look for neighborhoods and towns that have low crime, above average schools, and a good mix of people (in terms of profession, education, income level, and ethnicity). Don’t look for the perfect neighborhood, it does not exist. And in terms of schools, your children will benefit more from your involvement in their education than a “blue ribbon” school system (get involved with your child’s education and forgot about school rankings).
3. Can you get to your job easily? Look for neighborhoods that will not require a two hour drive to work each day, even if it means paying a bit more for your home (you’ll be glad to spend less time in your car in the long run).
4. Drive around the town or neighborhood you are interested in and observe what type of cars people drive and whether they use maids, landscapers, nannies, etc. If you notice big black German automobiles in the driveway and see “help” coming in and around the house you may want to think twice about the neighborhood (because there will be peer pressure to conform come moving day)
5. Talk to your potential new neighbors. Walk around the block and ring doorbells and introduce yourself (do you like the vibe your neighbor is giving off)?
6. What does the neighborhood “feel” like? Do you prefer a tree lined street with little traffic or do you want to be on a bustling block with a market around the corner? It’s going to be important that you feel right in your new surroundings.
7. Are you near your family? Too many young professionals lose site of how important a social network is when it comes to buying a home and raising children (these are the same people that use Facebook, Linkedin, etc. by the way). Friends and family can help with house projects and children (just think about how much you can save on day care if your mother is available to help, for example)
8. Reduce size expectations. Modern families do not need more space than families raising children in the 1950’s, for example. You do not need a huge family room and 6 bedrooms. Even with a large family you will do just fine with a typical three bedroom/one and a half bath home. My wife was raised in a 1920’s dutch colonial with six brothers and sisters and a single bath on a tiny urban lot (the family turned out just fine).
Superb tips for first time home buyers! Its just on time for us. Keep up good work.
Also, I would recommend buying a house with cash, Although I didn’t purchase mine that way. Our next one will only be bought when we have the cash to pay for it.
Going to have to bookmark this post. Planning on getting a house sometime in 2009 (hopefully).
Nice suggestions Vincent 🙂
Glad you found the post helpful! Good luck with house purchase, it’s a great time to buy a house (rates are coming down as well!).
I like using cash for everything as well. Depending on the interest rates I would maybe NOT buy a house all in cash (you may want to do other things with your money and if rates are favorable then it may be a ok to put between 20-30 percent down with a fixed mortgage rate).
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Awesome advise and very concise list.Thanks
Awesome advice and article.Thanks!