The other week, I posted an article about focusing on the big three expenses of housing, transport and food. How progress can be made so much more quickly by cutting down on the big expenses, instead of the smaller expenses.
Well today I will go into detail of how I managed to cut on housing costs. Just one financial move that will save me hundreds of thousands of dollars. Do you know how many coffees I would need to give up to reach that level of savings?
About 20,000.
77 years worth. I know which expense I would rather focus on first.
High cost housing
In 2015 I lived in a large 3 storey 4 bedroom house in a popular Wellington suburb. A 20 minute drive from the Wellington CBD.
I bought this place because it was modern and close to family, without being too far from the CBD. All my life I was told to buy as much house as you can afford, so I did.
The house was worth about $650,000 at the time. I had bought it a couple of years earlier for $600,000 by using my apartment I moved out of, but still owned, as leverage.
I rented out one of the spare bedrooms downstairs to help with the huge mortgage. I was paying approximately $2,700 per month on a $4,000 a month income.
This was only made easier by the rental income I was receiving of $600 a month. This means I was responsible for paying $2,100 a month out of a $4,000 income. Over 50% of my income was going on a mortgage alone. Once you add the other costs of home ownership I was also paying:
$200 a month in rates
$200 a month in house insurance
$550 a month in house maintenance
That’s an extra $950 a month in housing costs, on top of the $2,100 a month mortgage costs. That took my total housing costs to $3,050 a month or $36,600 a year. That was 76% of my after tax income of $48,000.
No wonder the bank was so reluctant to lend to me for this property. They declined my request on first attempt. Somehow I managed to convince them it was a good idea and they agreed. Maybe I should have listened to them first time around because things were tight. Very tight.
I had a company car, so at least I didn’t have transportation costs, but after housing costs I was only left with 24% of my annual income. $11,400 a year.
As you can imagine I was living paycheck to paycheck. After paying for food, I had very little money left over for clothing, entertainment and other budget categories. I couldn’t travel, and I was definitely in no position to save any money.
If my roommate left and I had delays in finding a replacement I would have been in huge trouble and not able to repay the mortgage. Yes, I could have rented out another room, but I was in my mid 30’s living with my now wife, and didn’t really want a fourth person in the house at that stage of my life.
The pressure of living like this for two years finally got to me and one day decided I had to sell.
Sure, it was nice to own such a large, nice and modern house with great views. But for what purpose? Was it worth the pressure that I was under? The answer was a resounding no.
return on investment
You would have thought a $50,000 increase in house value in two years would have made for a nice windfall for me, but you would be wrong.
We can’t forget about the costs I incurred just for owning the house. 2 years worth of:
Rates: $4,800
Home insurance: $4,800
Home improvements/maintenance: $13,200
Mortgage interest: $49,000
House sale costs: $21,000
Total 2 year ownership costs of $92,800.
This equates to a 2 year loss of minus $42,800.
I run these numbers as a reminder not to be fooled by everyone who has an interest in the property market. Almost everyone wants house prices to go up and as such, they will tell you that this house went up in price by $50,000 in just two years.
Although this is true, cash in the pocket is really what you should be concerned about. In my case it was a big loss.
Over time as the mortgage interest decreases, the house equity increases, and the house sales costs are spread out over a longer time, the numbers for home ownership will stack up a bit better.
Run your own numbers before thinking you are cashing in on a big gain. In reality you may be cashing in a loss like I did. Especially over periods of less than 10 years.
Anyway, I knew at the time of my decision to sell I would be making a loss. But I had no choice. I knew I couldn’t keep living with so much money stress and no savings. Besides, the loss had already occurred. It was a sunk cost and should have no bearing on my decision.
buying less house than i could afford
After accepting the fact that I had made a bad decision, and should have listened to the bank, I started the hunt for a new house.
My main criteria for buying a house this time around? That it was much cheaper and just the right size for my needs. My previous house was far too big for my needs.
I didn’t want to live paycheck to paycheck anymore. I wanted to build some savings for our future.
I didn’t want to go in huge debt to pay for a large house that I only spent a few hours a day in because I was at work all day every day to help pay for the damn thing.
As long as I could find a place to keep us happy and warm, that was the main thing. All the extras weren’t necessary since I was hardly home to enjoy them anyway.
This means we had to look slightly further afield. 20 minutes to be precise.
We started looking in one of the older Wellington suburbs, that had much older houses and presumably lower income families.
After several open homes we found a nice small 89m2 house with a large backyard that would suit our plans perfectly.
It was 3 bedroom for just the two of us, but we were planning to have children in the near future. There was to be no wasted space like our previous 4 bedroom 160m2 house.
Why pay for more than you need or use?
The impact of reducing housing expenses
The house we bought was just over one third the price of the house we sold. $420,000 cheaper!
You would think that finding a house that much cheaper would require moving to an area of the country with no employment or no amenities. This couldn’t be further from the truth though.
The move was just a 20 minute drive east. Still only 30 minutes from the Wellington CBD.
We took advantage of people’s negative perceptions of this suburb and found a great house at a great price.
The best thing is we have found the people here, in this so called bad neighbourhood, far more social, welcoming and accepting, than the people in our old well to do neighbourhood where everyone kept to themselves and didn’t want to know their neigbours.
Financially speaking, not only could I breathe again, but we could start saving towards our future.
Our annual housing costs went from $36,600 a year to $17,280 a year. Made up of:
Mortgage interest: Decrease from $2,100 a month to $1,000 a month.
Rates: Decrease from $200 per month to $140 per month.
Insurance: Decrease from $200 a month to $100 a month
Maintenance: Decrease from $550 a month to $200 a month.
An annual saving of $19,320 a year just from one 20 minute move out east.
There are also other benefits of a smaller house:
Lower electricity bill as it is easier to heat
Less time cleaning
Less time spent on maintenance and repairs
Less money spent on things to fill the rooms
Encourages family bonding
Smaller homes have a larger buyers market when it comes time to sell.
In 10 years of living here and investing the difference, this move will equate to extra savings of over $300,000 in just 10 years.
Not to mention the extra time it buys, by not having to do as much maintenance or housework.
Housing costs now made up much less than 50% of my after tax income, and significantly less than the 76% it was in our previous house. Because of this we now had money left over for saving, investing and also the occasional budget splurge should we feel like it.
By making such a large saving from housing, we now didn’t have to be so strict on ourselves with expenses such as food. Things we enjoyed did not have to be stripped to the bone any longer.
Of course the smaller expenses do add up and it does pay to pay attention to these too. But if you focus on the big wins, they don’t become as important to the point where you are depriving yourself too much. One housing move seems much better than worrying about every dollar for 10 years.
Final Thoughts
Budgeting sometimes gets a bad rap. Images of sacrifice, extreme cost cutting and couponing come to mind.
If you can get a one or two big wins from big budget categories such as housing or transportation, then the impact can be that much greater.
If you can find wins in these big categories, then your other budget items become less of a concern.
If I didn’t move houses, I would have never been able to find $19,000 a year savings from my other budget categories. And even if I could have, I would have been miserable.
I would also not be in a position to reach financial independence in the next 10 years or telling my story.
My move was not easy. I had an internal struggle for the best part of a year.
I thought I was doing the right thing buying as much house as I could afford. If anything, my next property move should have been up the property ladder. Isn’t that supposed to be the thing to do?
Yet here I was thinking of bucking the trend and moving down the ladder in my mid 30’s. It is not the done thing.
Sometimes it’s not easy to buck the trend, but your future self will thank you for doing the right thing by you, not society.
Our current house may not be as nice to look at, or the windows may not be as large, but who cares about that really? Especially when you are not home much to enjoy your house because you are working all day to help pay for it. This is the house that we got married in and are raising our daughter, and there is no where else I’d rather be at this stage of our lives.
If you need a personalised plan to make some progress towards your goals, then get in touch and we may be able to help.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here