Post of the Day
January 20, 1999
Living Below Your Means Folder
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Subject: Re: Salary vs. Car
The author shops for a home in San Francisco]
...among the other sound advice, they recommend not paying more than twice your annual salary for a home...
...You have got to be kidding? No one would be buying homes then. Are you saying that if you make $40,000 per year then you can't buy a house for more than $80,000? There are no houses that cheap in most cities...
I'm sure that it has been answered by now, but I haven't had time to read the 200 posts that followed the original. Nevertheless, I feel it is pertinent to recap the subject for those that may have just joined the board.
The authors of the book "The Millionaire Next Door" state that the mortgage should not be more than twice your annual salary. Not the price of the house - just the mortgage. Therefore, provided one has saved for a nice down payment - there really is no limit (except how much one has for a down payment) to the actual home price as long as the mortgage itself is only 2x one's annual salary. Primary reason being that you will never be able to save money if too much of your income percentage is going towards mortgage payments. The secondary reason tends to be more important and is really the most eye opening and worth the price of the book 10,000 fold. When buying too much house (living beyond your means) in a very desirable area - the average home buyer spends too much money trying to dress the house and lifestyle to match the neighborhood with other mythical 'must haves' - i.e., new car(s), new furniture, Oriental rugs, landscaping, new clothing, recreational toys, etc... . Add in property taxes and insurance to the formula and this creates an endless spiral of spending that will never allow one to accumulate wealth based on one's salary - probably no matter how high the salary.
|"Many of America's millionaires reside in the 'less desirable' neighborhoods in homes that are not the 'best on the block'"|
This is why someone living in a house below their means in a well chosen median neighborhood making a salary of $60K with a mortgage that doesn't exceed $120K may easily be able to accumulate wealth and have a higher net worth than someone who has a $150K annual salary that buys a $450K house (very typical and easy to do in metro areas) along with all of the mythical 'must haves' to go with it. Many of America's millionaires reside in the 'less desirable' neighborhoods in homes that are not the 'best on the block' where you might see many pickups and panel vans parked out on the street and in the driveways.
To be fair to the studies conducted in the book, the 'average' millionaire in America live in homes valued at $320K. Half of those homes have been their residence for more than 20 years which explains the increase in the value of the homes.
The book distinguishes between categories of wealth accumulation. The top quartile are called PAW's (prodigious accumulators of wealth). The bottom quartile are called UAW's (under accumulators of wealth). I highly recommend reading the book to see where you fit in - in terms of net worth and wealth accumulation. Plenty of formulas and reality checks are in the book. The book parallels many issues and discussions on this board.
The book uses a famous Texan saying to describe people who are living beyond their means. It is:
'Big Hat No Cattle'
The book is probably one of the best written dealing with the subject of accumulation of wealth and all the myths and pitfalls that surround the American consumers overspending habits.
Obviously, living in almost any metro area will push the test of this 2x annual salary mortgage because home prices are so high. Does this mean one shouldn't become a home owner or should move to an area where home prices are lower? Maybe, but not necessarily. After all, it isn't everyone's goal to accumualte wealth or become a millionaire. If it is, the book certainly points out the realities of what formulas seem to work and have worked in creating wealth of America's high net worth families. In the question at the beginning of this post 'Are you saying that if you make
|"the 'average' millionaire in America live in homes valued at $320K. Half of those homes have been their residence for more than 20 years which explains the increase in the value of the homes."|
I could go on and on, but in closing I'll list the 7 factors that the authors of the book discovered were common denominators among those who successfully build wealth:
1. They live well below their means.
2. They allocate their time, energy, and money efficeintly, in ways conducive to building wealth.
3. They believe that financial independence is more important than displaying high social status.
4. Their parents did not provide economic outpatient care.
5. Their adult children are economically self-sufficient.
6. They are proficient in targeting market opportunities.
7. They chose the right occupation.
The book studies these 7 areas in great detail. In short, buy the book and become enlightened.
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