While I’ve written many blogs in the past about first-world slavery (Are You a Slave to Consumerism?, Start Working for Yourself without Quitting Your Job!), I find myself inclined to write another blog on yet the very same topic yet framed in a different manner.  The reason I’m inclined to do so is that first-world slavery is a tough disease to battle because it’s fed by some very resilient bacteria known as misinformation and denial.

Now before you take offense and storm off, take a moment to bear with me and read this through.  Believe me, if this blog gets through to you, I guarantee it will transform your life in ways you couldn’t have imagined.  I may have just added another decade or two to your happy retirement!

Take a moment and write this down: “I want a bigger house because…”  Now, take a couple of minutes and write down all of the reasons that you want to buy a bigger house (or possibly even renovate your current one).  Once you’re done that, take a couple more minutes and write them onto two separate sheets – want and need.  I’ve done this exercise a number of times during my financial freedom workshops and in most cases, if you are being honest with yourself, the items will all end up on the want sheet (bigger yard, more rooms, balcony, higher end finish), in very few scenarios items may end up on the need sheet (new baby arriving, moving for work, etc.).  Be careful and be honest with yourself – the only individual who will pay the long-term consequence for any stretching of the truth in this scenario is you.

Now that you’ve done that exercise, let’s take a look at a couple of scenarios of possible homes you could purchase and/or possibly already live in.  Let’s consider the interest paid and  the monthly payment for the mortgage (excluding additional expense differences such as property taxes, heating costs, etc.).

While this scenario is simplified it serves as a solid baseline for which to perform an assessment (e.g. based on historical data, it is highly unlikely that you will receive a 3.7% interest rate average over a consecutive 25 year period; during this timeframe odds are that real estate interest rates will spike at least twice).

The chart above reveals to us that significant savings will result by buying a less expensive home…

As you will see above the third option ($350,000 home) saves $229,449 over the fourth option.  Suppose an individual earns $75,000 / year.  After income taxes, this individual will take home $58,297.96.  Buying the more expensive home in this instance will require the individual to hand over the entire post-tax income for 3.94 years salary.  But people live with the reality of day-to-day expenses and this is highly unlikely, even if this individual manages to be extremely aggressive and pay 50% of their salary (an absolutely daunting challenge), it would take nearly 8 years (7.88 years) to pay off the additional upgrade!

Is the upgraded house worth you working an additional 8 years of your life?  Waking up each and every day for 8 years and going to work because you need to, as opposed to because you want to?  Yes or no?  We haven’t even considered any of the lower cost options, but, in all these other scenarios the results get exponentially worse for the upgraded house.

Oh, and one more thing! So is 8 years all I need to consider?  Absolutely not! What could you do with the savings? What if you invested it in index funds (more info) because they are simple and for the most part you can set and forget (I only adjust mine once a year).  How does that impact things?  Assuming you will earn 7.8% based upon the fact that the stock market has averaged a return of 10.1% (7.8% adjusted for inflation) over the last 50 years, how much money would that $764 saved each month earn you in the long term?

Whoa!  Saving $764 a month not only saves 4 to 8 years of work that would be required in order to pay off additional interest on the higher cost home, if these savings are invested and earn average returns it will also earn you up to a whopping $701,746 in the market!  This could reduce your requirement to work by an additional 12 years (assuming your take-home pay is $58,297.96)!  Even better yet, this also assumes that while you slowly spend your stock market earnings you will continue to earn a 0% return on your stock investments going forward (which is highly unlikely). It also assumes you will have similar expenses when you retire (which most people do not).  This is truly a win/win/win scenario!

So let me ask you again, what does buying a bigger house cost you?  Is it just additional money or are the unnecessary upgrades keeping you a slave to your physical possessions?  Don’t become a first-world slave, don’t fall victim to your own consumerism.  I recommend only upgrading when truly necessary, otherwise I strongly urge you to stay put and be happy for what you’ve already got.  If I had my own advice nearly a decade ago my current house would be entirely paid off and I’d be retired today.  Take the time to learn from my consequence so you don’t make the same mistakes.

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Brent Mondoux
Founding Partner, Amplified Investments
brent@amplifiedinvestments.com