Save Money on Housing

Summary: Housing is American's biggest expense - 40% on average. Make smart choices and save hundreds of thousands of dollars! (Tweet This!)

Did you know that according to government data Americans spend 41% of their money on their home? Sure that’s data from December 2011, and furnishings and utilities, but still nearly a third of everyone’s money goes towards their rent or mortgage.

Saving money on housing

Plan well and you'll be tossing money around like this house.

Housing is the highest living expense for most people. It is one place where saving a little money can have a tremendous impact on your finances for years.

Buy Vs. Rent

There are epic debates on whether you should or buy or rent. The war has been waged for decades and will likely continue for many more decades. Those on the “buy” side say that renting is “throwing money away.” Those that rent say that they enjoy not having to fix everything themselves.

At some level, both situations can work. If someone were to rent you the perfect home for a single dollar a month, for life, you’d be a fool not to take it. If someone were charging you a thousand dollars a month for rent, but willing to sell it to you for ten thousand, you’d be a fool not to buy it.

The final answer is very complicated, but it comes down to:

  1. What is best for you
  2. The valuation of buying vs. renting

How do you calculate the valuation of buying vs. renting? Take the price to buy a property and divide it by the annual cost to rent a similar property. If that number is around 16, it doesn’t matter. If it is over 16 you want to rent and if it is under 16 you want to buy. If it is just 15 or 18, that’s only a small indication to buy or rent. However, if the number gets to be 12 and under or 20 and over, you’ve got yourself a fairly definitive valuation.

For example, let’s imagine I have a small starter home that costs $100,000 to buy. However, there’s one in the same development that’s for rent at $900/mo. The price-to-rent is 9.25 ($100,000 divided by an annual rent of $10,800). This number is far below 16 and a strong indication that you’d do much better to buy.

It isn’t likely that your perfect home is going to fit that ideal scenario, but you can do this calculation for similar properties to get an idea if your area is a buyer’s or a renter’s market. You may even find that there are helpful tables like this one from Bankrate that give you the price-to-rent ratios in many cities as well as the United States in general. As I write this, Honolulu is 34.63, which almost commands you to rent. Conversely Detroit’s 7.16 number couldn’t scream “Buy Me!” any louder.

Improve Your Credit

Whether you are buying or renting, you’ll want to have the best credit score possible. If you are renting a great credit score tells the landlord: “I’m a responsible person who pays my debts on time.” A poor one says, “You are taking a big risk if you rent to me.” Which renter do you think has more power when it comes to negotiating a rent?

When buying a home, your credit score is even more important. It is used by banks to determine how much interest you’ll pay on a mortgage. A small difference in an interest rate means quite a bit over the 30-year span of mortgages that most people get. It can easily lead to a difference of a hundred thousand dollars or more.

Learn to Negotiate

Whether you are buying or renting, you are going to end up at the negotiating table. The seller or the landlord wants to maximize their money too. If you can negotiate just $50 a month off rent, you’ll save your $600 a year.

If you are buying, you may be able to shave ten or twenty thousand dollars off of the price.

Don’t Buy Too Much House

You’ve probably heard the expression “House Poor.” This happens when people pay too much for their home. The monthly payments are so large, they don’t have enough money for other necessities. And that means no money for saving and investing. And that means delaying your journey to financial freedom.

Your goal should be to buy a home that fits your needs. Many people think they need a McMansion, but living in small home can lead to a big payoff. They are (typically) cheaper to buy, require less furniture, and are easier to heat and cool saving money on utilities.

Some people take the “smaller is better” saying to the extreme and choose to live in very tiny houses. This allows them to pay off their mortgage in just a few years. The tiny house lifestyle isn’t for everyone, but eliminating one of life’s biggest expenses in a couple of years is a huge step to financial freedom.

Putting it All Together

These tips can save you hundreds of thousands of dollars over your lifetime. They could jump-start you to financial freedom. When buying a home, the stakes are tremendous. Decisions that seem small make a huge difference.

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Money / Personal Finance, Save Money, Smart Spending

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