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?
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.
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.
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.
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).
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, is one that I highly recommend because I think it does an excellent job of highlighting the importance of living below your means. If you want to hear more inspiring stories of how it’s possible to achieve wealth no matter your income, this is a truly excellent read.
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