When I tell my neighbors here in Cincinnati that I grew up in San Diego County I almost always get the same reaction.
“You’re from San Diego? Why did you move here?”
They are then further shocked when I follow with:
“Cincinnati is, by far, the best place I’ve ever lived.”
Want to know why? While I love the fact that I could be out in the countryside horseback riding and then downtown at a food truck within 20 minutes time, that’s not the reason. The depth of history, culture, architecture, and food story is similarly not the main reason. The reason that tops them all is that there are fewer places where I can live this well for less. Having this low cost of living empowers my life in countless ways. For example, the low cost of real estate enables me to pay off the $70,000 mortgage I have on my (pretty rad) schoolhouse condo in just 15 years of time. That will further liberate me from living with those costs for the remainder of my life thereafter.
Meanwhile, back in California…
It Costs How Much to Own a Home in California?
This weekend a friend of mine posted an article entitled “See how much income you’d need to buy a home in most California cities“. In summation, the article states that the median sales price for homes in California is a whopping $393,000. The article further states that a household would need to bring in $78,000 per year in order to afford such a home. This assumes a 20% down payment, an interest rate of 4% on a 30-year mortgage, and annual property taxes and insurance equal to 1.2% of the home price. Here is the kicker. This assumes that 29% of your annual gross income is spent on housing payments.
“In what brand of hell can a salary of $78,000 afford a $393,000 home?”
How Much Home Can You Really Afford?
Suffice it to say, I don’t believe that 29% of gross income is the right metric for home affordability. I believe it should be quite a bit less. Not everyone agrees with me. In fact, Bloomberg Business believes that the percentage should be even more than 30%. However, in my household we have a 15 year mortgage and condo fees. If you include property taxes and our condo insurance, we ring in at 7.2% of our gross income or 13.3% of our after tax income. I realize that not everyone lives in Cincinnati (or bought their home during the housing downturn when properties were mega cheap). However, I can speak to how much living below my means liberates my lifestyle.
My best advice is to live as far below your means as possible. The only way to get ahead is to consistently spend less than you make. To do this you need to decrease your spending to the lowest point possible on every line item of your budget. While I don’t believe in the whole “owning a home is the American dream” trap, I do believe that the quicker you can free yourself of having to pay rent or mortgage payments every month, the better that will be as well. Owning your own home, and having no more remaining monthly housing payments ever, is the most powerful way to bring your income down so that you can afford to retire as early as possible. That’s kind of the end goal to this whole financial game we are playing in first place, no?. So, here is what I think when it comes to buying a home:
- Pay at least a 10% downpayment. Ideally you would pay a 20% downpayment, but we did not and we still lived to tell the tale.
- Stick with a 15 year mortgage instead of a 30 year mortgage. You will get a lower interest rate, and you will pay a whole lot less for the same exact house in the end.
- Keep your monthly payments between 10-20% of your income after taxes. That will afford you the ability to save for retirement, save yourself from uncertainty with an emergency fund, and live a life where your possessions do not possess you.
Now, let’s say you already have a mortgage, and you are wondering about whether you should pay it off early. I’ve got something for you too! Find out more in “’If’ and ‘How’ to Pay Your Mortgage Off Early“.
As always, tell me what you think below.