Here are some interesting thoughts from Stop Acting Rich: ...And Start Living Like A Real Millionaire on why your home has so much of an impact on your wealth:
What we don't realize is that the true cost of living in certain homes and neighborhoods is unseen but truly devastating. I believe the greatest detriment to building wealth is our home/neighborhood environment. If you live in a pricey home and neighborhood, you will act and buy like your neighbors. In other words, human beings have an innate tendency to act and be like those around them -- to fit in -- and even compete. The type of home we live in and where we choose to live often takes the greatest toll on our financial wealth, and from it, all other perils flow.
Ok, there's more to come on this topic, but let's stop here for a moment. He says that buying a big home that you really can't afford (that's what he's talking about mostly -- reaching for something well beyond your means that sucks the life out of your finances) is "the greatest detriment to building wealth." Wow. Greater than over-spending in other areas? We'll see in a minute, but he'll say that your home influences what else you spend money on, so if you're over-spending in other areas, much of it is due to where you live. That's why he says it "often takes the greatest toll on our financial wealth" as well as from it "all other perils flow." Food for thought, huh?
Here's some more detail:
The more expensive, the more affluent neighborhoods are a vortex of sociological forces. The more affluent the neighborhood, the more its residents spend on almost every conceivable product and service. From cars to haircuts, and from wine to watches, those living in "prestige estates" spend more. We take consumption cues from our neighbors. If many of our neighbors have a much higher level of income and wealth than we do, we will have set ourselves up to lose the war before we have even begun to battle.
Think about all the things we see in our neighborhoods that influence our purchases: new/nice cars, lawn service, remodeling/house upgrades, bikes/toys for kids, swimming pools, yard equipment, and on and on and on. Let's face it, the Joneses that most people are trying to keep up with are the ones next door! And if your neighbor has a huge expensive house with all the latest "stuff", you're very likely to match (or even try to surpass) what he has. And if you stretched in the first place to buy the home, then you're in trouble trying to buy all the other stuff too (think this sort of sounds familiar?)
The author goes on to tell what the truly wealthy do when it comes to home buying:
Contrary to popular belief, however, most of the self-made millionaires I have studied have one thing in common: They were able to build wealth precisely because they never lived in a home or neighborhood environment where their domestic overhead made it difficult for them to build wealth. In essence, they ran their households like a productive business. It is not only about how much you make. More important, it is how much you keep. And the "keep" component begins and ends at your home address.
A few thoughts:
1. Notice how he didn't say something like "most of the self-made millionaires I have studied have one thing in common: they made a ton of money." Nope. Instead, the path to wealth involves buying a home (and living in a neighborhood) that you can easily afford.
2. Both making money and controlling spending are important to wealth generation, but notice which is more important (and much more controllable by the way)?
3. This has been my personal experience as well. Looking back, one of the key reasons we've been able to grow our net worth is because we bought a home we could easily afford and thus our associated expenses have been at the level that we can handle them financially. It's still a very nice neighborhood, but is well below what the bank would have loaned us based on our income. Yet another reason to decide for yourself what you can afford in a home -- don't let a bank or real estate agent tell you what you can/should spend. (That said, I think banks are a lot more careful these days than they were when we bought our home 10 years ago.)