Personal Finance

When I was first working in my professional career after college, I remember some advice that an older colleague mentioned to me. She said:

Always buy the most house you can afford. Although your money might be tight for a year or two, you'll eventually get a raise, have more money to spend, and you'll have a really nice home and investment for your efforts.

I definitely took this advice to heart and have spent my adult life consistently buying up as my housing needs have evolved over time. As a result, and thanks to the amazing home price accelerations of 2004-2005, I now have a personal net worth that will carry me through the future with ease, due primarily to the value of my current home.



However, a couple of years ago, another friend of mine said something that made me question the concept of being house-rich and cash-poor. She was going through a divorce and was selling her beautiful home to buy a much less expensive home that was affordable on her income. I asked how her two teenage girls were adjusting to such dramatic changes, including the thought of losing their home. What she answered definitely rang a bell for me -- she said:

I talked to the girls about our choices. I told them we could manage to keep our large home, but everything else would be a struggle for us. There wouldn't be much spending money for clothes, vacations, movies, eating out, etc. Or, we could move to a smaller home and have plenty of cash for the fun things in life. When we talked it over, all three of us agreed that we'd rather have a little more room for those fun things in life.

This statement hit me like a ton of bricks. It had never really occurred to me that you should consider keeping a greater amount of discretionary income instead of having a higher mortgage. And, yet, I had always felt very restricted in my ability to take vacations, buy furniture, eat out at nice restaurants, have an extensive wardrobe, or buy my kids the latest gadgets. I could definitely see that she had a point. Maybe having a little bit of fun along the way wasn't such a bad goal!

Now, as always, I'm talking about using good judgment in determining a trade-off between the size of one's mortgage and the size of one's discretionary spending budget. We all have to prepare for retirement and putting our kids through college. We have to be wise in building our net wealth for what's to come in the future. But, just maybe, we could seek a mortgage level that is a few hundred dollars a month less than the maximum we can afford. This few hundred dollars a month in discretionary spending could provide a lot of flexibility in our lives to enjoy the journey as we travel along.

Personally, I've been considering a move down for about the last six months. I've had the big house with the luxury appointments, and I've learned something surprising. This lovely home hasn't brought me any level of happiness beyond what I would feel living almost anywhere reasonably nice. For example, my kids make me happy, but most homes have enough bedrooms for us. My horses also make me happy, but I can find nice horse properties for much less money than my current property. Watching cable TV and cable news is a primary pastime of mine, but most homes have cable or satellite programming available. And, I love to read and work on my computer -- hmmm, easily doable in any house. So why have a gigantic mortgage and no discretionary funds? It's a darn good question!

Before I close, let me mention two things that do matter in my selection of a home: a secure and safe neighborhood and an excellent school district. These attributes contribute directly to the quality of life in my chosen home. And, there may be other uniquely important attributes to be considered in your own selection of a perfect home. So, while the investment value of your home choice may be an important consideration, perhaps my message is that it should not be the singularly decisive factor in choosing your next home.