One of the single biggest financial decisions that most of us will ever make is the choice of home that we buy. I would argue that this is actually the MOST important financial decision you will ever make, but not for the reasons you are probably thinking.
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We all know all the usual reasons why people say that your home is one of the most important financial decisions you’ll ever make: 1) It is a large investment, often in the six figures, 2) Not only is it a form of investment, but it is the place you will live, love, and possibly raise a family, 3) It will hopefully increase in value over time, especially if you keep it for many years.
Set the Stage for Future Life Spending
However, I think that there is a much bigger reason why your choice of home is such an important financial decision: Because it can set the stage for future life spending for years to come.
Huh? What does that mean?
Let me put it this way: Think of your home as the canvas for your financial life. A canvas is blank when you start painting, right? Think of all of the “accessories” of your life as paint on the canvas.
Basically, the home that you choose to buy is a huge determinant of your future spending. The “paint” on the canvas is going to look different depending on the house, am I right?
Direct costs
Say you buy a home in an affluent neighborhood. Not only is the purchase price of your home going to be higher, but there are a whole lot of other things that are going to be more expensive as well. You are probably going to pay higher property taxes on a more expensive home. If it’s in a more desirable school district, or if you live in an area that levies a school district tax, you may have to pay more because of the school district.
More expensive homes are often in areas that have home owners associations, or HOAs. HOAs often do a lot of great things like maintain the common areas of the development, but they don’t come free. HOA fees can be nominal in some cases, but in many cases can run into the hundreds or even thousands of dollars per year depending on the facilities that need to be maintained.
Do you live in or near a large city? In some cases you pay more income tax depending on where you buy a home. For example, Mr. CMF and I used to live in a suburb of a large midwestern city. We had to pay income tax in three different municipalities: 1) Suburb A, which we lived in, 2) Suburb B, which Mr. CMF worked in, and 3) the large city, where I worked. We also had to pay a regional tax to live in the part of the state that we lived in. We also paid state tax in that state. We also had to pay a school district tax. When we moved in 2012 to a much less-taxed area in a different state, our accountant was amazed at all the taxes we’d been paying just to live in that metro area for three years.
Hidden costs
Aside from taxes and all of the direct costs of living in certain areas, the more insidious cost of living in certain areas, especially more affluent areas, are hidden. That is, you don’t necessarily see the costs written in black and white on your tax forms, but they are still there and can in many cases be even more expensive than the direct costs of living in those areas.
How is that possible? You ask.
It’s simple. Having more affluent neighbors means you, your spouse, and your children are all likely to be exposed to individuals who spend more. On everything. Period.
Why Should That Bother You?
Well, it doesn’t have to bother you. I do think it is totally possible to live in those areas and be a frugal rock star all day long. You can ride your bike everywhere and make your own laundry detergent while you grow all your own vegetables in your backyard garden. However, even if you’ve mastered the art of not caring what your neighbors think, that doesn’t mean that the same will hold true for everyone else in your house.
This one is a biggie. Keep in mind, if you live in an area where you are constantly exposed to fabulous neighbors with fabulous toys, even if you are immune to it that does not mean that the rest of your family members will necessarily follow suit. This can be especially true with kids, who may not care as much about the family’s financial plan as they do about having the same cool toys and gadgets that their friends have.
Social Pressure
What happens when you start getting invited to all the neighborhood events? Cookware parties, makeup parties, purse parties, you name it there are parties for it! Are you going to feel comfortable being the only one not buying?
Even if you lay off the “sales party” scene, you will still inevitably be invited out with some of your neighbors from time to time. Will you feel comfortable dining at more expensive restaurants? When you are invited to your neighbors’ homes and they “go all out,” in terms of a beautifully set dinner table, five course meal, and oodles of cocktails, will you feel obligated to reciprocate? Worse still, would you return to your home and take a look at your well-worn dining set and swiftly inform your spouse that you’ll need to purchase a new dinner table before you can invite the Smiths over to reciprocate?
That type of social pressure can be a powerful force. Your plates and bowls with all the chips in them seemed perfectly fine yesterday, and all of the sudden you would be enormously embarrassed to allow your neighbors to see them. Along the same lines, perhaps you and your family have always been fine shopping thrift stores for children’s clothing, but suddenly seeing Little Billy and Janie Smith romping around in their Baby Gap makes your children’s attire not good enough.
And speaking of children, it is not uncommon for families in more affluent neighborhoods to send their children to private schools. Even if you and your spouse may be perfectly fine with little Suzy and Johnny attending the local public schools, what happens when they start to want to attend the same schools that all their friends in the neighborhood attend? What then?
The hidden costs of living in more affluent neighborhoods can FAR outweigh the direct costs if you’re not careful. I think that the home that you buy- and more importantly, the neighborhood that you buy it in- can easily be the single biggest financial factor in your life. If you buy a less fabulous home in a less fabulous neighborhood, you automatically do yourself a favor by giving yourself a lower bar to hurdle in terms of neighborhood standards. You can actually let your neighbors save you money.
Then
Mr. CMF and I admittedly lived in a much nicer neighborhood in our previous home than the one we are presently living in. This time around we purposely bought a smaller home in a relatively low income neighborhood with the intention of keeping it to rent out when we are done living in it. And the single biggest difference in our new neighborhood is… (drum roll, please)… the neighbors. Our next door neighbors at our former home drove a new convertible. I know because not only did I see it all the time, but I had to borrow it once to drive into the city and get keys from Mr. CMF one unfortunate day when I locked myself out of the house. I was terrified of wrecking it, knowing full well that it cost more than both of our cars put together.
However, they were among the only neighbors who actually kept their car in the garage- most of our neighbors had their two-car garages completely stuffed full of boats, jet skis, kids’ toys, and just lots of “stuff.” A different neighbor once gave us a $50 gift card once just to thank us for having them over for dinner! And yet another neighbor seemed to be constantly either at a tanning booth or sunbathing in his driveway. He bragged constantly about how he worked at Victoria’s Secret corporate and knew all the models (yeah, that guy was just weird).
Now
In our current neighborhood, we live among construction workers, teachers, and grocery store employees. Down the street are a dozen or so duplexes. Most of the homes have only single car garages so a lot of people park their well-used cars on the street. While our old beater cars were rather out of place in our former neighborhood, they fit right in here (well, they did until we traded one in for a newer vehicle a couple months ago).
Why should you care about your neighbors, you ask? That’s the cool thing- you don’t have to! We tried hard not to in our last home, although sometimes it was hard. For example, we had no idea what to do when those neighbors gave us a $50 gift card just for having them over for dinner! Give them a gift card back? Invite them along to use it (it was a restaurant gift card)? Invite them over for dinner again?
Take It All Into Account
Suffice it to say, there are a LOT more factors to take into account when you buy a home than just the home itself. Your home really can make a big statement about your financial priorities, and if you buy too much home or buy a home in a neighborhood where the neighbors have vastly different financial priorities than you, it can have a big impact for years to come. This is definitely a place where you can choose your own financial age and allow that to save you a large amount of money for a long, long time.
What do you think? Can you think of any ways in which your neighbors influence your spending?
Suggested Reading: My very favorite personal finance book, The Millionaire Next Door
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I don’t think I could handle that pretentiousness living in a community like that anymore. But first a bit of history – we live on a cul-de-sac with just two houses and our neighbours are the Jones – BMW, cottage property, pool, hot tub, all the latest toys and gadgets, season tickets to hockey and football. However, they are really nice Jones. After many years, I realized we could not keep up and now I admit how stupid I was to even try. It doesn’t make us happy. Now I’m just happy if we can keep our yard, reasonably presentable. Sure, we have a well used pool that badly needs a new liner but that’s about all. My husband got a $100 bottle of scotch from them for his 60th birthday, often gets invited to sporting events and we will happily look after their aging dog in a few weeks when they go out of town for a family wedding. I’m just happy they are good neighbours and we no longer feel bad for our inability to keep up. I’m also happy that we have a great location and it will bode us well when we eventually renovate and downsize.
Good for you. I think there is something really freeing about realizing that you can’t- or have no desire to- keep up. And that’s great that you have such a good relationship with your neighbors!
Interesting post, Dee. I live in a more affordable neighborhood and definitely don’t feel pressure to keep up appearances. The only downside of buying in a transitioning neighborhood is how quickly my property value has gone up and increased my property tax bill. This is not something that I anticipated five years ago.
Hey that’s a good problem to have, right? I can think of worse reasons to have increased expenses 🙂 That sucks that your tax bill went up though!
This reminds me of the book The Millionaire Next Door, when Stanley talks about how parents do their kids a disservice by providing the down payment for a home because maintaining living in the home will cost them so much.
I love that book. I’ve read it probably over a dozen times. Every time I come down with a case of the “I wants,” I re-read it to help me keep my focus on our end goal: financial independence.
We’re thinking about buying a home soon and have considered all the potential costs, except for the cost of being neighborly. I never really considered this before, but what if we choose a neighborhood were people love to party? Would I join or be the party po*per of the block? Hard to say.
I guess we’ll have to think of yet one more thing when it comes to buying a house. Or maybe I just won’t care… yeah I probably won’t.
It’s an often underestimated cost of owning a home, that’s for sure.
You make a great point about how ‘the company we keep’ can affect our spending. We have made a point of avoiding close friendships with people who seem to equate fun and spending money. (If you’re not blowing a lot of money, you can’t be having fun!) We enjoy simple pleasures, and mostly we hang out with people who have the same values. Just as its crucial for financial success and harmony to choose a spouse with similar values, the same is true for friends!
Exactly. And I hate to seem to have a bias toward people who live in nicer neighborhoods- but in our experience there were far more big spenders in the nicer neighborhood we lived in rather than the more modest neighborhood that we live in now.
These are things I haven’t thought about yet, as we don’t plan on buying a home for a while. I would have been really confused about the $50 gift card, too! That’s crazy. Taxes will play a large part in where we end up, as they really can make quite a difference. I know my parents were paying at least $8k a year where we used to live, and now it’s under $1k. I wouldn’t mind having a smaller house with less extravagant neighbors! Great points here.
We love it. Pretty much everything is cheaper in terms of the mortgage and taxes, AND we feel less pressure to have nice things “just because everyone else does.”
Great points! I did not even think about quality over the price! I admire how you compared the two situations between ‘Then’ and ‘Now’, making the difference between a more upscale neighborhood, rather than the more affordable neighborhood. This really makes you think about what is worth more in the long run!
It has definitely been an eye-opening experience for us to live in two very different types of neighborhoods and find out for ourselves how different the neighborhood influence can be!
I never really thought that much about the neighborhood. And, good gracious, some places have a regional tax??? Like it’s not bad enough to get state and city taxed. Honestly, the main reason I’m all for getting the heck out of NYC after just one year of living here is because I’m irritated with paying $1,200 just to live here! I’m just meant to be a Jersey girl.
I love to visit NYC, but I don’t know if I could ever live there because of how expensive it is! Just knowing that my money would go much farther if I lived in a different city would make me crazy.
Awesome post! These are all things we’ve been thinking about recently. We won’t sell our home for another 3-10 years (that’s the plan, anyway), and when we do we want our next home to be our “forever” home. We don’t want to bounce around from property to property — even if the bouncing takes 5-10 years each time — because it’s not financially smart. So we’ve been thinking about everything that goes into buying a home, both things that we want and things we need to consider because of the finances. Definitely thinking about the statement we want to make next time around 🙂
There really is a LOT to consider when you purchase a home! This was something we really took for granted when we purchased our first home, but the second time around it became a lot more clear to us that many factors can impact your cost of living!
Our neighbors definitely influence our spending because they are all obsessed with their yards. We felt the need to have ours treated this year just so it doesn’t stand out in a bad way =/
I hear you! We did the same thing when we lived in a nicer neighborhood. Landscaping peer pressure…
Dee, this post is absolutely amazing. I never thought of it that way. I’m not very influenced by neighbors and I hope that when I have kids, they won’t be either. But, they won’t have had the same financial experiences as me, so it’s something I can’t expect. Thanks for this!
I think kids are especially likely to fall prey to this, because usually they have little knowledge of the family financial situation AND they are heavily influenced by their peers and mass advertising like commercials.
I’m really glad we picked a modest no frills house. We never feel any pressure in our neighborhood to “keep up with the joneses”. At the same time, as long as we take care care of our property the value should continue to grow. We have easy access the highways and live only about 20 mins away from downtown. For us, our purchase was all about location. Sure, it isn’t the dream home, but we have a manageable mortgage that allows us to live our lives as we please.
Amen Liz! We feel the same way about our current home. We say all the time that it’s been the best financial decision we’ve ever made, because it allows us to have a cheaper mortgage and a low cost of living. That in turn allows more breathing room in our budget for investing and paying down our debt faster.
We moved to an area where most of our neighbors are a generation or 2 older than us. Several of our neighbors bought their homes in the 1960s when the homes in this area were built, we actually bought our house from the guy who built it almost 50 years ago. Since most of these people are retired or at least in a latter stage in life, they have some cool stuff set up.
We have a long driveway that I shovel by hand, with a good snow it can take a few hours. Every time I see my neighbor John crank up his lawn tractor with a giant snow thrower on the front I get tempted to buy one, He has that thing done in 10 minutes! I just have to remind myself of my goals, and that being in our 20s we won’t have all the cool toys as the guys in their 70s and 80s.
Oh wow, that would be hard to watch him crank it out in just a few minutes while it takes you hours! Maybe you could become good buddies with him and he might plow your driveway for you…
Definitely – the decision to upgrade should not be taken lightly. We found that it was cheaper to stay put and pay for private school than to move to a community with better schools – and higher taxes, and higher housing prices, and a more expensive lifestyle.
Taxes especially can really kill you in areas known for strong school districts. When you take it all into account it does not surprise me that paying for private school is a better option.
Great post…completely agree that one’s house choice can have lasting financial impacts well after the closing costs have been paid.
For the reasons mentioned in your article, I will add this tip: Buy as small and as cheaply as you can. Upgrade only when the home no longer suits your need. Keeping your housing expenses as low as possible will provide you with the financial flexibility to save and invest. Not to mention, you sleep much better at night also. 🙂
You hit the nail right on the head when you mentioned “financial flexibility” I think. That’s really what it is- keeping your household’s overhead expenses to a minimum will free up cash for you to use for extra debt payments or investing.