A top priority should be to control expenses—especially
your major living expenses like housing, food, transportation, health care, and
recreation—if looking to achieve financial independence and retire sooner. Let’s
take a look at housing—the single largest expense for many, and one that can
all too easily sabotage your journey to financial freedom.
Housing-related decisions will impact your financial
independence by years, if not decades. Homes are a
downright dangerous expense variable, because price tags are high,
leverage (borrowing) is usually required, and various financial “experts” with
their own agendas are usually involved. And houses expose our vanities,
tempting us to spend for the approval of others, instead of in our own best
interests. Losses of tens of thousands of dollars are routine in real estate,
and can completely derail your savings plan.
Even when you don’t suffer an outright loss, changing homes
is expensive. How much does it cost to
change homes? According to Zillow, closing costs to a home buyer run from
2% to 5% of the purchase price. The seller doesn’t have mortgage-related costs
but is likely paying a realtor commission as high as 6% or 7%. Then there are
moving costs, and the inevitable shakedown costs with any new home: painting,
carpets and curtains, repairs, supplies and furnishings, and basic improvements
to suit your lifestyle. In short, changing homes is frightfully expensive, and
will probably eat up most of the average family’s potential savings for several
years running.
Anytime the choice to move is yours, stop and consider the
expenses. The worst possible choice would be an optional move into a larger
house that you don’t really need. You are taking on a big one-time expense,
plus a bigger ongoing mortgage and maintenance obligation. If more space is
truly necessary, consider instead modifying your current home.
Once you’re in your home, be smart about home
improvement projects, especially those you can’t do cheaply yourself. Trying to
create the “perfect” home is an uphill battle, at best. Borrowing to improve
your home is an especially bad idea. You can spend vast sums of money without
measurably improving your quality of life. And old assumptions about getting
that money back when you sell are outdated.
Lastly, while there are situations where it makes sense, on
paper, to hold a mortgage, for those truly dedicated to financial independence,
the disadvantages of debt often outweigh the benefits. In general, pay off your
mortgage as soon as possible. Using extra income to pay down a mortgage loan
can be a solid investment in today’s low-return environment.
In short, maintaining a home will be one of your largest
life expenses. Pay careful attention to your housing decisions if you’re serious
about financial freedom.
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