I clicked around on Streeteasy this past weekend. Just for fun.
Well, you know how that goes.
Of course I fell in love with an apartment for sale. Even though I’m technically not in the market to buy a place.
But hear me out.
The master bedroom had a walk-in closet–the stuff of my HGTV dreams.
The current owner is an architect, and judging from the renovations, has excellent taste. Like the built-in bookshelves for my bookworm husband and the marble bathroom for me. All we’d have to do is show up with our stuff.
Then there were the bathroomS–yes, two of them. In New York City. That’s unicorn status. Nevermind that we don’t need a second bathroom. The excess of it all was the exact appeal.
Plus, the apartment was right next to the subway station. That would cut down our current ‘walking to the subway time’ from seven minutes down to one. Six minutes of our lives would now be regained!
But it was time to start thinking rationally.
When assessing a place to live my first criteria is zooming in on the floor plan to solve this very important question: Where would the cat litter box go?
And my second order of business? Looking at the numbers.
After plunking down the standard 20% as a down payment, the mortgage and maintenance would be around $4,400 per month.
That’s a 66% increase over what we pay now. Of course.
The five online calculators I consulted said we could swing it. But the calculators only cared about one thing: our incomes.
Was that the only factor we should consider? I mean, incomes aren’t guaranteed to last. Just last week I witnessed yet another round of layoffs at work. And with outrageous daycare costs in the US, it’s not uncommon for one parent to eventually stay home.
Depending on a calculator for a major life decision didn’t seem right. Because in general, once you sign a lease or buy a place, housing isn’t something most people can quickly change.
So how does one decide how much is the right amount to spend on housing?
You can start by looking at the housing rules of thumb, but those can be confusing, too. There are so many different income-housing ratios I don’t even know which one to follow.
In New York City, there’s the famous ‘40X your rent’ rule. If you live outside of NYC, then you might not be familiar with this guideline that a lot of landlords use to weed out apartment applications: prospective tenants must make a salary that is at least 40x the monthly rent. For example, if the monthly rent is $1,000, then the renter needs to make at least $40,000 a year.
But at that salary, I would have never felt like I could afford to spend $1,000 on rent. I mean, I could have, but I wouldn’t have had much of a life.
The more universal rule is budgeting 30% of your gross income to housing (which mathematically works out to be the same as the NYC rule above). So if I was making half a million dollars, would it be reasonable to spend $12,500 per month, just because it fits neatly into a rule? And if your salary increases, do you keep upgrading to more expensive places if your current place is fine? Just because you can, doesn’t mean you should.
And wait–do these percentages apply to your take-home pay or gross income? Because I can’t exactly spend money that’s going to taxes.
On the buying front, mortgage lenders think you should spend no more than 28% of your gross income.
Then there’s the famous 50/30/20 budget rule, where 50% of your take-home pay goes to “necessities,” but that includes not just housing, but other stuff like transportation, utilities and groceries. I can’t imagine anyone sitting there and carefully siphoning out each bucket, so they perfectly match the guideline.
When I look around at what’s being done in the real world, most of us don’t use math to make housing decisions.
I’m on a few forums for work, and sometimes people ask for advice on housing. They’ll always list their income, then the rent number they’re thinking of spending, and finally they want to know whether or not that’s “affordable.”
No mention of debt, other financial goals, or even how they feel about spending a significant amount of money on housing. They just want to know what’s “normal.”
When I think about myself, I’ve never followed any of these rules, either. But I did base my decisions on how I personally felt about housing costs.
I thought $1,600 per month for run-down apartments in central Boston were a rip-off. So I moved to the outskirts to get what I thought was a better value. Sure it made going out a little trickier, but logistics were easier to navigate than feeling trapped by my expenses.
Don’t get me wrong: spending a lot on housing can make sense if you value your home, and especially if you’re frugal in other ways. It’s tough for me to not get wistful about an apartment that’s perfect in every way. But then I think about how that extra $1,750 would hold me back. I’ve got other goals that cost money, too.
To keep the housing FOMO at bay, I mentally reserve money for other things that might come up later down the line: helping mom with money when she retires, chipping in for my niece and nephew’s educational expenses, perhaps dealing with my own daycare costs. And right now, settling for a “good-enough” living situation gives me the freedom to do things that are exciting (to me) without feeling overburdened.
Like this weekend when I decided to spend $2,000 on the hotel I wanted instead of settling for the $500 Airbnb.
So right now there’s an invisible line at that $4,400 number, and I don’t want to cross it.
But still, I sometimes wonder if I’m being way too conservative. Because wouldn’t that marble bathroom be nice?
How did you decide how much you could afford on rent or your mortgage? Did you follow a guideline or was it more of an emotional decision?
Feature Image: Unsplash