The first personal finance article I ever wrote was titled “Your Pumpkin Spice Lattes are costing you $250,000 and Pushing your Retirement Back Years”. The point I was trying to get across is that the little expenses in life add up to large amounts of money. In this article, I’m going to discuss the number one expense that keeps most people broke. No, it is not your latte habit.
While it is true, that the little expenses add up over time, big expenses add up right away.
That seems obvious to the point of sounding silly, of course, big expenses add up to large amounts of money!
Sometimes money-nerds like myself spend too much time talking about the cost of that daily Starbucks run and not enough time talking about the three biggest line items in our budgets.
Housing, transportation, and food account for more than 60% of the average household budget. That is why whenever I talk about budgeting, I lump these expenses into one category that I call “The Big 3”.
While it is important to get a handle on all of “The Big 3” expenses, Today I want to focus on housing costs.
If you find you don’t have enough cash to meet your financial goals, you probably spend too much money on housing.
Housing costs account for one-third of after-tax, household income in America. That means for every dollar earned (after taxes) 33 cents goes to housing costs.
For income earners in the bottom 20%, they spend 40% of their income on housing.
We need to rethink how we look at Housing
Housing costs have been never been higher.
- The average cost of housing has increased by more than 40% since 2012.
- The average monthly rent was $1,500 in 2018
At first glance, you may look at those numbers and say, “how is anyone supposed to reduce the amount they are spending on housing when the prices keep going up?”
It’s a fair question.
But I have another fact about housing costs that you have likely never seen before and might blow your mind.
- Adjusted for inflation, the average housing cost per square foot has only increased by 4.6% since 1973
We are spending more money than ever on housing, but the cost per square foot has barely budged in nearly 50 years. How can that be?
The reason we spend so much money on housing is that people are demanding bigger, and bigger houses.
- In 1973 the average house size was 1,660 square feet
- in 2015 the average house size was 2,687 square feet
The average home is 62% bigger today than it was in 1973. That is even though we have fewer people living in these houses.
- In 1973 the average household had 3.01 people living in it
- In 2015 the average household had 2.54 people living in it
Our houses have never been bigger, and we have never had fewer people living in them. As a result, square foot per person has nearly doubled from 551 in 1973 to 1,058 in 2015.
It should be no surprise to learn that we hardly use most of the space in our houses. One study tracked how a family used the first floor of their house during their waking hours spent at home.
They found that of the 1,000 square feet available on the first floor, only 400 square feet were used regularly.
If we assume these results are typical, the takeaway is that we are living in houses that are twice as big as we need.
There are a lot of costs associated with having a big house. Apart from the larger mortgage, you will end up paying more for every other cost associated with homeownership.
- Property taxes
- Landscaping (big houses have big yards)
- General maintenance (big houses have big roofs)
Bigger may not mean better, but it sure means more expensive.
If you want to improve your financial situation, housing is the first place to start. It’s probably your biggest expense and you probably could make do with less than half the house you currently pay for.
Before you make any decisions on your housing, you should set financial priorities. Spending a lot of money on housing isn’t necessarily a bad thing. If having a big house makes you happy, who am I to tell you to move into a smaller house that will make you miserable.
Write out a list of your top five financial priorities. Personally, my top 5 financial priorities are;
- Preparing my finances for starting a family
- Increasing my savings rate
- Increasing my income (through my day job and my side-hustle)
- Helping others
Living in a big fancy house does not make my top five financial priorities. My wife and I live in a nice home that we love, but it is nowhere near 2,687 square feet.
It would make no sense for me to live in a big house because I would have to sacrifice on something I value more, like traveling or investing. Where I spend my money is in alignment with my financial priorities. That means I have done a good job creating a budget.
Write down your top 5 financial priorities and ask yourself if where you are spending your money reflects the 5 items on your list. If housing is your number one expense but does not make your top five financial priorities, you may want to consider downsizing.
If you are not willing to downsize your home, you could also consider implementing some form of “house-hack” to reduce your monthly housing costs. House-hacking is finding a way to generate revenue from your home.
The classic example of a house-hack would be to buy a duplex where you live in one unit and tenants live in the other. The rent you collect from the tenant could be used to reduce your living expenses.
If you live in a single-family home, you could always consider putting your house up on Air BnB when you are out of town. Alternatively, you could rent a spare room in your house.
The point is, housing is likely your largest expense, so you need to be intentional and strategic with your housing choices. If housing costs consume half of your paycheck, it doesn’t matter how many lattes you cutback on. There simply won’t be enough money to hit your financial goals.