Housing is the number one expense for American families. If you focus your energies on saving money anywhere, focus here.
That doesn’t mean avoiding home ownership; it means ensuring you make a smart financial decision in owning a home that aligns with your early retirement goals.
Simply put: buy a house comfortably in your means and become a young millionaire, or buy a million dollar house young and chase debt until you are in your 60s.
Certainly there are alternatives that can lead to FI (househacking, playing the market, etc.), but the Secret Life of FI is not going to try to convince you to abandon the good old fashioned 30 year mortgage family home model.
You can still make sound choices on housing to become FI decades earlier than the average American in a 4 bedroom house with a white picket fence and (gasp) kitchen island. I did and so can you!
The Secret Life of FI recommends you boil your housing decision to just two maxims:
- 20% down payment
- Mortgage payment is 20 – 25% of take home pay
Side note: Only 5% of Americans use Adjustable Rate Mortgages (ARM), but these mortgages have the lowest rates. Hence ARMS give the lowest payment, reducing how much take home pay your mortgage consumes. You can, then, either pay the mortgage off early or refinance before the introductory 7 or 10 year period ends for the low rate.
While there is a general rule that your house payment can be up to 30% of your pay, a noted Harvard study found that nearly half of Americans spend even more than 30% of their pay. Over half Americans also cant even save 3 months of living expenses, so while this is a benchmark, its not a healthy one.
If you love your job and believe you will be happily and safely working into your 60s, then by all means, borrow every last dollar you can and buy the biggest house you can secure a loan for like your fellow broke Americans.
Banks will loan it to you. They’ll even let you do it without a 20% downpayment, and then make you buy private mortgage insurance (PMI) to absolve them not you of risk, pumping your expenses up even more.
But if FI is your goal, then you want to save the 20% downpayment first and stick to a house that is far below your maximum means (20-25% of your take home pay), which will allow you to put your money to work for you in the market as early as possible.
This may mean waiting a few years longer to make your first home purchase, like the FI family. This may also mean buying multiple house in your lifetime, in effect upgrading according to the size of your wallet not to the size of your eyes. With increased salaries over time and excess savings, for example, the FI family upgraded to a nicer home 9 years after they bought their first.
Okay, you might be asking, what does that sacrifice buy you? If you wait to accumulate a 20% down payment, and you buy less house now and trade up later when its within your means, how much can this impact your journey toward to FI?
How about as much 7 figures in potential investments in early retirement!
With smart money moves on housing, you can become a millionaire long before the average retirement age of 62, just on what you saved (and invested) on housing alone.
You can move your personal saving rate from a paltry 6% (typical limit to receive company match) to up to 20% or even 30% of your income. Even on a median family income, those types of savings invested can grow to as much as 7 figures before you reach social security age.
Below I’ll run through how much of an impact this decision had on my family’s journey to FI in 15 years.
How the FI family differs from the average American family
How does my family differ from the average? Well, first, the average married couple buys before saving a 20% down payment. My family waited nearly 4 years and rented instead. We had the 20% down payment plus over a year’s living expenses in savings before we jumped into home ownership.
Second, my family paid our mortgage in full on a $250K house in under 6 years, as opposed to most families who make minimum payments for 30 years.
How much do minimum payments cost? A LOT!
Would you hesitate to sign a mortgage if you knew in actual dollars it would cost 2X the price listed? The average American home purchase price has been $300K or north for a decade. A loan for a $300K house will cost more than $600K (including PMI) by the time the house is fully paid in 30 years (assuming a loan rate of 5% and 10% down).
Note: If you have a low mortgage rate (perhaps 4% or less), brokerage investments rather than house debt payoff could have a greater return. Either option is available if your savings rate is high due to buying a house comfortably within your means.
How much did the FI Family save?
Running some simple comparisons, I estimate we saved at least $185K in housing expenses over 15 years, which if 100% invested as accumulated might be worth $350K today, and likely well over $1M in another 15 years, a full 8 years before the average American retirement age of 62.
The FI family saved for ~4 years until we had 20% to purchase our first $250K house in 2010, paid it off in 2016, and bought a $330K house in 2019 debt free (Full disclosure, our house sale lost $10K. No profit here. The $90K needed for the new house debt free was funded with savings from having no mortgage for 3 years!).
Despite the upgrade, over 15 years my family spent $185K less (worth $350K if invested over 15 years) in monthly mortgage payments than if we had take out mortgage(s) with payments 30% or more of our income when we got married.
Housing is an emotional decision, but its also your most major financial decision
I know that sacrifices in housing may be amongst the hardest to make – it certainly was for me. My family made less sacrifice in housing than other major expenses, because Mrs. FI and I are home-bodies at heart and want to live in a nice property. We even upgraded to a nicer house like most Americans (lifestyle inflation), but we did it responsibly and within our means.
Wise decisions here, even for a middle income family, can either make you a millionaire in 30 years, or it can leave you still dependent on a full time job to pay your bills in 30 years. Which path will you choose?
Run the numbers on your home (or desired home) today, and see how much a 20% down payment and early payoff (or early investment of savings) can shave off your years to FI. You can determine this in less than 15 minutes of research.
If you haven’t already done so, don’t waste another minute. Run the numbers today. Its never too late to join the Secret Life of FI.
Note: I personally prioritized house debt elimination over investments to reach FI, and no doubt, there are reasonable counter argument that 100% stock investments are more valuable. Whether you invest the monthly savings, park it in the bank, pay off debt, or perform some combination of the three is the subject of another study. The point: you’ll only have the luxury of this choice if you make smart money moves on housing to begin with.