Trading on Anticipated Future Wealth: Homes & Cities

Not your typical for sale sign.

Not your typical ‘For Sale’ sign.

A recent article in The Boston Globe highlights the issues Bostonians are considering related to purchasing homes in affluent areas. The piece recites a financial-planning principle: “A bit of perspective: In many parts of the country, the rule of thumb is that housing costs should occupy a third of one’s income. Here, that standard frequently doesn’t apply.”  Because of rising real estate prices and a desire to keep up with the Joneses, many Boston families are spending upwards of 40% to 50% of their income on housing, which strains the rest of the family budget and can lead to stress as those families struggle to pay for the rest of life’s needs and the additional expenses that come with an expensive neighborhood.

This article reminded me of a passage in The Millionaire Next Door:

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.

– The Millionaire Next Door, p. 68.

While the numbers nationwide may not be as bad as those currently playing out in the Boston suburbs, the concept of spending today in anticipation of future wealth continues to plague those who are unable or unwilling to understand the long-term financial impact of large-scale purchases.

But fortunately consumers have good data to help them make these tough financial and life decisions, including deciding where to live based on where homes are the most affordable. Dr. Tom Stanley highlighted the potential impact of this analysis in a blog discussing the cost of living and making tough decisions about where to work and raise a family. In this case study, the subject, Ken, traded Manhattan and its extraordinarily high cost of living for a city in the South where it was much more likely that he and his family could become financially independent. It was a tough choice that was viewed with skepticism by some of his peers, but ultimately it paid off over 15-20 years of reduced livings costs.  In the current environment of rising real estate prices and stagnant wages, the idea of living below your means–not above them–especially when it comes to housing, is as important as ever.

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