Evaluate Opportunity Cost - Rent or Buy?

Tip # 252 – Evaluate Opportunity Cost. Rent or Buy? Should we go with Door Number 1 or Door Number 2? Opportunity Cost is a term that many business majors are introduced to in Economics 101. Others may or may not be aware of the term. Basically, opportunity cost is what you give up when you make the decision to do something else. For example, suppose you have one free hour each evening. And suppose that you are a personal trainer who can make $50 an hour in the evening training a client on exercise, but instead you decide to watch an hour of television one night. Your opportunity cost for that evening is $50 because you lost out on making $50. In other words, you chose to watch t.v. and relax so you lost out on making $50. If instead you choose to train your client and earn $50, then your opportunity cost is an hour of relaxation, which is what you lose out on.

So how do we apply this to our own lives? Well, there is opportunity cost in most everything we do. And it’s not always related to money, but since this is blog on how to save money, that is what we will discuss. Opportunity cost is helpful in making financial decisions. One particular decision that comes up in most households is "is it better for us to buy or rent?"

Let's look at an example. Suppose you have $50,000 saved for a down payment on a house. You also know that you have $2,000 available per month to put toward housing costs (rent or a mortgage payment). You can rent a 3-bedroom home in town for exactly $2,000 and keep your $50,000 in a money market account earning 5% interest. On the other hand, you can put the $50,000 toward a down payment on a $250,000 home leaving you with a $200,000 mortgage that over 15 years with principal and interest and taxes costs you $2,000 per month. The local economists predict that houses will increase in value at 1% per year in your neighborhood for the next 15 years.

If you rent the house for $2,000 per month, after 15 years, your $50,000 is worth about $105,000. On the other hand, if you buy the house, after 15 years, your home will be worth $290,000. If you decide to rent, you are giving up the opportunity cost of owning a home free and clear in 15 years that has a worth of $290,000 (and also living in a house you own and can do what you want with). If you buy the home, you lose the opportunity cost of having a very liquid $50,000 in your bank account for emergencies or other expenses plus earning $55,000 in interest during that time period (as well as the ease of picking up and moving whenever you want).

Clearly, in some cases, we don’t fully know the opportunity costs since some financials are based on estimations. Do we put our money in a CD earning a sure 3% and miss the opportunity to possibly make much more if we invest in stocks. Or do we invest in stocks and miss the opportunity to have a guaranteed rate of return. Only you can make these decisions, but make sure you evaluate not only what you will get if you choose A but also what you will lose if you don’t choose B.

In Real Life (IRL) – I’ve read many discussions online regarding whether it’s better to rent or own. Clearly, we can never 100% accurately predict whether we’ll have to up and move in the future or whether the housing market will bomb or skyrocket in the future. Unfortunately, when we make decisions, we have to work with only information we have at the time as well as our best predictions fro the future.

So, is it better to rent or own? Clearly, as my example above shows, waiting to buy is not always the best case scenario. Of course, that may not be a realistic example. Perhaps homes selling for $250,000 would not rent for $2000 per month. And maybe housing prices end up dropping by 1% every year rather than increasing by 1%. On the other hand, I have a real life example that shows why putting a down payment on a home at the right time has been better for us than to keep on renting. And I'm anxious to share it since many people are down on home-ownership today.

We bought our home in November 2000 for $290,000. We put $70,000 down, which is a fairly hefty down payment (24%). According to tax records our home was only worth $231,000 in 2000 (so it appears as if we overpaid!). Even taking that into consideration, we got a good deal. The value of our home steadily increased over the next 6 years according to tax records:

2001: $240,000
2002: $310,000
2003: $381,000
2004: $406,000
2005: $490,000
2006: $595,000

When the economy started a downturn, housing values dropped across much of the nation. But in the DC area, while prices did fall, they didn’t drop by as much as in other places.

2007: $593,000
2008: $593,000
2009: $550,000
2010: $535,000

(Note that the 2009 and 2010 values reflect a $12,000 addition we did on the house, so to be fair, the value would be lower without it). Even taking the addition into consideration, our house would still be worth over $500,000 today. And houses in our neighborhood still consistently sell for above tax assessments.

So had we rented for a couple more years we would have lost the opportunity to buy a “low priced home.” We would have never gotten our foot in the door. The difference between the rent we were paying (on a smaller place in not as nice of a neighborhood) and our home mortgage was $600 per month. Over 4 years, we would have only saved about $30,000 more had we kept renting. But in 4 years our home was worth over $100,000 more than we paid for it. Clearly, renting for longer would not have been a good decision on our part.

Our opportunity cost by buying was loss of flexibility to move fairly quickly and savings of $600 per month plus interest as well as interest on our initial $70,000 down payment which totals about $125,000 (if I'm earning 5% interest and our rent didn't go up at all in 9 years, which it has dramatically). Had we continued renting our opportunity cost would have been about $300,000 in net worth (the amount the house is currently worth minus the amount we owe on our loan minus the down payment of $70,000 which we would have had in either case).

(I can also give you an example where renting would have been better for us than buying but I’ll save that for another day.) How do you evaluate opportunity cost? Has renting or buying been better for you? Did you make the right decision?

***I used Bankrate to do some of my interest calculations.

Real Estate CAN Be A Good Investment

Tip #183 - Real Estate Can Be A Good Investment. The party line these days seems to be, “Don’t invest in Real Estate.” “Real estate is not a good investment.” “Your home is not an investment.” I want to put myself out there and say I disagree. Yes, if you bought your home three years ago and sold it last month, it probably was not a good investment. With that I agree. If you bought an investment property in Florida in 2004 and tried to sell it today, you probably will have lost a fair amount of money. With that I agree as well (from personal experience, I might add).

Does that mean that real estate is always a bad investment? No. Does it mean that real estate has always been or will always be a bad investment? No. Does it mean that no one has ever made money on real estate? No. Therefore, can real estate be a good investment? Yes. So when we hear the talking heads and the media and most of the general public say that real estate is a bad investment, I think we are hearing them speak based on being “reactive” to what has happened in the real estate market in the past few years. However, what has happened over the past few years isn’t typical of the real estate market over the long term or other shorter-term periods.

Let’s look at other scenarios – when real estate has been a very good investment for some. According to City Data, the median house value in Sea Isle City, NJ in 2000 was $257,200. In 2007 it was $633,681. Do you think the person who bought a house in Sea Isle in 2000 and sold it in 20007 thinks real estate was a bad investment? Probably not. How about the person who bought a house in suburban Philadelphia in 1972 for $40,000 and sold it for over $250,000 20 years later? Does that person think he made a bad investment by buying a house rather than renting? Probably not. So why does everyone say that real estate is a bad investment? Because if you bought two years ago and tried to sell today, you probably lost money. That’s all.

But like every other investment, we need to look long-term. Has real estate gone up over the past 50 years? How about over the past 20 years? Are there certain areas where real estate is still a good buy? If the answer to any or all three of these questions is yes, which I believe it is, then real estate can be a good investment. Yes, it helps to know what you are doing. Yes, you need to know where the good places to buy are. Yes, you may need luck on your side. But it can and is a good investment in many circumstances. For example, real estate can bring balance to a person’s portfolio that may lean heavily toward a certain type of investment. It also can provide a place to live or can offer rental income. Which brings me back to the main points of this post – look long-term with real estate. Don’t come to general conclusions just based on what has happened in the real estate market in the past two years. Because what has happened is atypical, just like the huge increases a few short years earlier were also atypical. However, consider that real estate can still be a good investment in the long-term.

In Real Life (IRL) – I have been interested in real estate as an investment since I was a young teenager. Or perhaps a better way to say it is I’ve been exposed to real estate as an investment (on an almost daily basis) since I was a teenager because my dad was passionate about it. Nearly every day in our house and in the car we would listen to a local real estate show on the radio about real estate. And even though I tried to drown it out with my Bruce Springsteen cassettes on my Walkman (yes, I was cool), I sometimes had to suffer through endless talk radio about real estate. Fortunately, in the process I picked up a few things and actually did become interested in it later in life. What I learned was real estate at the Jersey Shore and other places can be a very good investment. And my dad should have bought a condo in Cape May when he first considered it in 1980 not only because I’m pretty sure he would have at least quintupled his money by now, but because I would have had a nice place to go every summer. :-)

Seriously, though, real estate in the long-run has often been a good investment. That may not be true in every little town in the middle of nowhere, USA. But it was certainly true on coastal towns and big cities in the mid-Atlantic and many other places. And lately every time I hear or read on blogs that real estate is not a good investment, I cringe because it’s simply not true any more than when someone says stocks are not a good investment. Some people do well in each of these types of investments, and some do poorly. Lately, in real estate, a lot of people have done poorly. But many people over the years have also done very, very well in real estate. And I venture to bet, many more will do very well with it in the future, too.

Now to give you a real life example, my neighbor sold his house last month. I was watching it closely because it’s not too different than ours. The lot size is a little smaller. And there’s one less bedroom, but one more garage. So when I looked at his selling price I had to do a double-take: $599,000! And this is for a 1960’s, 3-bedroom split level on slightly more than a quarter-acre. “They’re crazy!” I told my husband. “They will never get what they are asking for. In this market! Ha! What are they thinking? Don't they know that the real estate bubble has burst?” After all, that’s all I hear about day in and day out is how bad real estate is and how much money everyone is losing. And while I did think he could have gotten something close to his asking price at the height of the housing market a few years ago, I was positive he was asking way too much in this market. In fact I thought he was asking about $100,000 too much. Guess what? I thought wrong. Today I finally found out what his house sold for: $575,000! I never in a million years thought he would get anywhere near that. And you know what? According to the housing records, he bought his house exactly 11 years ago for $237,000. I’m pretty confident, he thinks real estate can be a good investment, even in today's down market.

So when you are considering buying a home or purchasing some real estate for investment, take everything into consideration, not just the news on the media today. How long you plan to hold on to a place; when you buy; location, location, location; and of course a little bit of “luck” are all big factors on whether real estate will be a good investment for you. Consider it carefully.

How To Live Cheaply In An Expensive City - Part 1

Tip #155 - How To Live Cheaply In An Expensive City – Part 1. It is easier to live cheaply in a place like Wichita, Kansas than it is in New York City. Even though wages are higher in a place like New York City, it usually does not make up for the cost of housing, which is generally the largest chunk of anyone’s budget, as well as many other expenses that are higher in the big city. By looking at a cost of living calculator, a home in Wichita, Kansas that costs about $250,000 would cost $1.1 million in New York City. Going by that alone, one would need to make more than 4 times the salary in New York City than in Wichita. So how does one make it in a large expensive city like New York without going into debt? Like everyone else – by saving money on expenses. It just may be a bit harder to do in the big city than in other places.

Since housing is the largest chunk of most people’s budgets, when living in the city you need to find a way to keep your housing costs low. There are several ways to keep your housing costs down.

--One popular way – especially if you are young – is to find a roommate to split housing costs. A two-bedroom apartment is less than twice the price of a one-bedroom place. You also don’t use twice as much utilities, saving you money there as well.

--Find a place near public transportation, if you are working in the city. Prices of homes near subway and bus lines are usually more expensive than those that are not. However, if you factor in the cost to park at a bus stop or the cost of the extra transportation to get to the subway, then it may be more economical to live within walking distance.

--Find an older home. Older apartment buildings and older houses generally cost less than a new home. You might have to give up on some amenities, but be honest with yourself whether you would really use the exercise room in the swank new condo or if you need granite countertops in the new home. By forgoing some of these extras, you can save a bundle.

--Look for a private rental. Apartment buildings may not be flexible with their prices if they are in demand. But individual owners may be willing to rent their basement apartment or whole house for less than corporate buildings. Presenting a clean rental history with solid references and a professional appearance will go a long way with potential landlords. Landlords are often willing to sacrifice a bit of rental income to get a good tenant.

--If you are new to the city, wait to purchase a home. In large metropolitan areas, there are usually dozens, if not hundreds, of neighborhoods and towns to choose from to live in. Get to know the city before you commit yourself to buying in an area you may not like when you get to know the city better. Realtor fees and moving fees will drive up your expenses quickly if you want to move to a section of the city that you like more.

--Try to stay in your apartment as long as possible. Moving around often costs a lot of money. In addition to the cost of movers, there are start-up costs for turning on your utilities each time you move – this may include separate fees for water, gas, electricity, cable, and telephone. There also may be move-in/move-out fees associated with your apartment. And you may have to pay for temporary quarters as well as storage if your move in and move out dates don’t line up.

While housing is the largest expense in most people’s budget, especially for those who live in big, expensive cities, in the next part of this series, we will discuss ways to cut down on other living expenses while living in a large city.

In Real Life (IRL) – While I have never lived in New York City, my family hails from there, so growing up we visited my grandmother and other relatives quite often, and I got a first-hand taste of the high costs of apartment living in New York. I grew up in the Philadelphia area, but lived in the surrounding suburbs, rather than the big city so have no real world experience of living in that city. After college, I moved to the Washington, DC area where I got a pretty good taste of the expenses of big city living. While I didn’t live directly in the District of Columbia, I lived just outside the city limits in various types of housing, garden-style apartments, high-rise apartments, and townhouses and commuted into DC for my job.

I was able to save money on housing in the DC area by using several methods I highlighted above. I started out having roommates – at some point as many as four roommates! There really is no better way to cut down on housing expenses than by sharing expenses. And when you are young and single, it’s often more fun to live with friends, anyway. The lowest rent I paid (this was the early 1990s) was about $250 when I was splitting an apartment with two friends. As I got older and was making more money, and had frankly gotten tired of sharing living space, I decided to move out on my own. Costs had more than tripled to live on my own! My rent was $800 per month! That was a huge difference in my monthly expenses.

Monthly rent for a one-bedroom apartment for $800 might sound like a lot to someone in Kansas, but it was a bargain – even for the 1990s. Going rates at the time in comparable commercial apartment buildings were about $1,000, but I was able to rent a condo from a private owner who lived overseas. He may not have been aware of how much housing was, so when I found the deal, I grabbed it. (Today the same place would probably rent for $1500.)

Most of the time I lived near the subway (Metro) line. Because I was commuting into the city, the higher rent still made it worth it to me. Saving a few dollars each day in parking, gas, and insurance fees made up for the higher rental cost (and saved a lot of hassle of driving in traffic as well).

I lived in older buildings. The high-rise condo I lived in wasn’t as fancy as some of the newer ones. And there were no washer/dryers in the units. But living in an older building saved me about $300 per month (factoring in the going rental rate, rather than my discounted rate I was paying to my overseas landlord) over comparably-located newer buildings.

I waited to buy a home once I got to know the city better. I was tempted to buy a condo a couple of years after I moved to the DC area. But in addition to not wanting to be tied down, I was unsure for several years about which part of the city I liked best to live in. And when I finally did figure it out (Bethesda for those familiar with the DC area), I met my husband and needed to relocate to a different part of the city as his job is in the outskirts.

The only advice from above that I did not follow was to not move around often. In fact, since moving to DC 20 years ago, I have lived in 7 different places – the first 5 were in the first 10 years. There were many reasons – the first place was temporary housing. The second place was in a neighborhood that I didn’t really like. The third place got crowded with too many roommates. And after the fourth place I wanted to branch out on my own. So I suffered the consequences and put up with moving costs as well as all of those utility deposits and turn-on fees. But overall, I have done okay with housing in this big, expensive city I live in by following most of the advice I gave in the first part of this post.

The More Changes You Make, The More It Will Cost

Tip #105 - The More Changes You Make, The More It Will Cost. Years ago, people did not move around as much as we do today. They often were born, lived, and died in the same town, and sometimes even in the same house. They usually had one job throughout their lifetime. They bought things to last as long as possible and used it until it broke. Not true today. Today, our society has become such that many people are constantly changing, constantly upgrading, constantly moving and trying to improve their lifestyles. And those changes cost money.

Each time you buy a house, you have mortgage closing costs, clean-up costs for the old house, moving costs, possible storage costs, realtor fees, and maybe other costs. In addition, each time you buy a new home, you start a mortgage over again. And most of us know that the first years of paying a mortgage are primarily interest payments. So by moving, you are delaying your opportunity to build equity in your home. In short, it costs money to move.

What about your job? Many of us look for better jobs that pay more money, are better suited for us, or have better benefits. But each time you start a job at a new company, you may be losing out on other benefits from your old company. Many companies have a 401(k) match that they will pay you after you have been “vested” or working there a certain number of years. Other companies give you more vacation time when you have put in a certain amount of time. Still others offer an Employee Stock Ownership Plan (ESOP) or similar plan. And that company may provide a match once you’ve worked at the company a certain number of years. And don’t forget seniority and reputation that you have built up at a company. All of those things are lost when you change jobs. That’s not to say that you should not look for a better job or one more suited to you, just that you need to take into consideration that there are lost benefits or costs associated with starting a job at a new company.

Lastly, there are things in our life that we often upgrade or change. We may want a newer, smaller, more technologically advanced cell phone. Or maybe we want a different cable television or satellite system. Or perhaps we want to upgrade our washing machine. In addition to the obvious cost of the new product, there are other costs associated with these changes. A change to a newer cell phone may mean you need another type of replacement battery or a new charger. With the new television cable or satellite, there is often an activation fee and a setup fee. And that new washing machine you want to buy may cause you to buy a new dryer in order for them to match.

Anytime we make changes, those changes cost us money in lost benefits, extra fees, or additional associated costs. So it is important to take this into consideration when making big purchases. Is it worth it to buy a starter home and then move in five years or should we buy our long-term home now? If I take a new job, will I lose out on some vesting on my 401(k). Maybe I should wait a year until I am fully vested and then leave. Do I need to upgrade our computer/cell phone/camera/television or will the associated costs make this upgrade unreasonable at this time? These are questions you should ask yourself or consider when you are thinking about making a change to your job or when you are buying a long-term product like a house or a car or even a refrigerator or a service such as telephone or cable. If you know you will want to upgrade it in coming years, consider if it is worth it to buy the product that will last in the long-term from the getgo. It may be or it may not be. Just realize if you don't, that there are costs associated almost every time you make a change.

In Real Life (IRL) – In addition to being conscientious about saving since I graduated college, I realize that I have made other decisions in my life that have helped me save money. I didn’t necessarily do them knowingly, but it seems that is how it has worked out. Since college, I have only had two jobs. And I have been out of school for 20 years this May. Many of my friends have had five jobs or more. I didn’t have a dream job when I graduated. I was only making $19,500 in 1989 in the expensive city of Washington, DC. I had friends working at Big 8 (as it was then) accounting firms who were making $30.000 or more. But the company I worked for had good benefits. They even had a pension plan which was unheard of even in those days (they have since gotten rid of it). I stayed at that company for 9 years. Because of that, I am vested in their pension plan. I was able to move up internally to a completely new department for significantly more pay ($34,000) a few years later because I had a good reputation within the company because I had been there a number of years. I contributed to the 401(k) match after waiting the typical one year for participation. When I left that job for one better suited for me, I already had built up a nice retirement nest egg. I may not have been able to do that if I left before the vesting of the pension or if moved frequently and lost out on that one year of waiting to make retirement contributions each time I switched jobs.

For the company I am with now (I am not actually working, but I am still currently employed there on an hourly basis if they had hours to give me, which they don’t), I am not fully vested in their ESOP plan. It takes 1 year of waiting plus 5 years of full time work to be fully vested. Because I only worked there full-time for 4 years (the remainder hourly), I am only 60% vested. I hope to go back within a few years and at least get two full-time years in to get the rest of that ESOP match. Sure I can look for a job elsewhere, but the least I want to do is get the rest of that ESOP match before I do.

Another area where we have kept costs down is by buying just one house. When my husband and I (no kids) bought our house in 2000 we were looking for a home that we could live in for at least 5 years. But we knew we would like the possibility of living in it longer if we could afford a house big enough. Our budget at the time was $250,000 for a home. However, $250,000 would only buy a 3-bedroom ranch with one bathroom. I was really adamant on having a second bath so we looked at higher priced homes up to $300,000 (which we could still well afford). By doing this, we went into a whole other level of homes – bigger ones made of better materials with more square footage and that second bath. As it turned out, it was probably the best decision we've made by buying a bigger home. We now have three children and we are able to stay in this home comfortably until our kids are grown. We considered moving to a bigger house when I was pregnant with my third child, but when factoring in the closing costs, the realtor fees, and moving costs it didn’t make sense to move. Instead, turning a porch into a bedroom made the most financial sense for us, in addition to emotional sense since we love our home and our neighborhood, too.

I would say we have incurred more costs on the small electronics front than I would like. My husband is constantly upgrading his cell phone, which necessitates a new case, a new charger, etc. I know it’s a small cost compared to cars and homes, but the extra costs are there nonetheless. When we changed our cable to satellite back to cable to fiber optics over the past 9 years, we have had to pay start up fees, connection fees, service fees, etc. Fees that you don’t incur if you stick with what you have. Again, it doesn’t mean it wasn’t the right move for us, but it did cost us. So when you are thinking of making a change to a job or a new home or buying something initially like your first home, think about what extra costs you will incur from this change now or if you make one in the future and whether it is still worth it to make the purchase.

A Home Near Your Job Is Not Necessarily The Best Home For You

Tip #91 - A Home Near Your Job Is Not Necessarily The Best Home. Buying a home is a big semi-permanent event. Most people buy homes to live in for a long time. And with the economy the way it is, fewer people will be buying them to flip in the short-term. So if you are buying a house to live in, why not buy one near your job? It will make the commute short; it will cut down on travel costs, and allow you to spend more time in the house you just bought?

Well, because the job you have now is not necessarily the job you will have next month or next year or in five years. So when you quit your job or are laid off, you are stuck with a house that is near a company that you no longer work for. And maybe this town near your job really isn’t that great. You just bought there because the commute was short. So now what? Do you limit yourself and look only for jobs nearby or do you search for jobs on the other side of town or the next town over? Then you have a long commute and live in a place you don’t love.

My advice is to buy a house in a town you love. If the town you love is 45 minutes from work, then take that into consideration when buying, but don’t let it prevent you from buying there. Remember, chances are you will live in your house longer than you will have that job. And more time is spent in your town than at your job, especially when you take into consideration the other members of your family. What is important to you in the place where you live? The schools? The other residents? The parks? The amenities? The commute to work is only one component in home buying. It shouldn’t be the basis of where you buy.

In Real Life (IRL) – This advice is really my brother’s. He has always said that you should buy where you want – not near your job. And I didn’t always agree with him, especially since I had the same job after college for nine years, I wasn’t sure that I would ever leave. But then I did and guess what? He was right. I used to work in the city (Washington, DC) and I commuted via Metro everyday. But then my next job was in the suburbs – actually not too far from where I lived. Then I got married and my husband secured his job, which was about 40 miles from my job. So we could be near one, near the other or not near either. So you know what we did? We found a town we loved and bought our house there. We took our commutes into consideration, of course. But we did not make it the only factor. I have since stopped working, although I hope to go back one day. My husband commutes 25 miles each way to his job.

But we love where we live. It’s a nice town. I meet nice people in it everyday. I like the schools. The amenities - a library, a community center, parks and stores - are all within walking distance of my house. And if my husband gets laid off next month, which I really hope doesn’t happen, then he will look for a new job. His commute may be shorter or it may be longer, but we will still like where we spend our weekends. Our kids will still be happy at their schools. And we will still have great amenities nearby to take advantage of. While I don’t think we will be in this home forever, we bought it hoping to stay here for twenty years or more because we like the town so much. And that is more important to us than the commute to our job.

Update, Don't Renovate

Saving Money Tip #57 - Update, Don't Renovate Your Home. With the onslaught of home improvement shows, it's easy catch the renovating bug. You might be tempted by kitchens with granite countertops and stainless steel appliances in newly-laid out floorplans. You might want to knock down walls to open up rooms. You may feel the need to have a bathroom with a separate shower and tub. There is no end to what you can do to renovate your home.

These types of renovations can be very expensive. And while they may add value to your home, you probably won't get back all that you put into it. In addition, some renovations can be an over-improvement for the neighborhood or even for the rest of your house.

To avoid costly renovations, try updating it instead. When trying to decide what to do to update a certain room, look over it carefully. What is the worst feature of the room? Is it the wallpaper? The gold shag rug? Change those. Are there still acceptable parts of the room? Keep what's good. You will still get the effect of a renovation without going top of the line.

IRL - I love home improvement shows. HGTV is my favorite channel. I love to watch what houses people buy and what designers do to make the homes look beautiful. But sometimes I get the feeling that I am the only one in America who does not have granite countertops. Seriously, that is all I see on that show.

I mentioned in an earlier post how we updated our 1950's kitchen. We still have the original nice wood cabinets. This was still a pretty good feature in the room. So we left it. We covered the ripped laminate floor with a black and white laminate tile - just like a 1950's diner. We bought a replica diner kitchen table and chair set. We ripped out the 1980's splash paint border and put a new one with cute diner signs -" hot dogs for 10 cents" and the like. And we bought replica tin signs on the walls such as "Route 66". And whenever I am at thrift stores or yard sales, I keep my eyes open for things that would look good in my 1950's diner kitchen. The total cost of our update was about $1,000. We get compliments on it all of the time. And it stands out from all of our friends' kitchens with the Tuscan beige walls and the stainless steel appliances.

I have a friend who did do a major renovation to their kitchen. Their house is 1960's and not much else has been renovated in their house. After spending $40,000 - yes you read that right - their kitchen makes the rest of their house look shabby. The worst part about it is there was so much potential in their kitchen. For the most part, all they really needed was a new sink and countertop. The wallpaper had to ripped down as well. The cabinets were nice hardwood. All they needed was updated hardware. And the floor had been replaced just a few years earlier. They seriously could have done an update to their kitchen for under $2,000 and a little bit of sweat equity. And the style of the kitchen would have at least matched the rest of their home. Also they could have then used some of the money they saved by updating their dated yellow bathrooms. PS. Those granite countertops will look passe in 15 years anyway. :-)

Buy a House Where You Want to Live

#5 Saving Money Tip – Buy a House Where You Want to Live. As a continuation of yesterday’s post, I wanted to elaborate a bit more on buying a house. This post will not directly save you money, but it might in the long run. Many people decide to buy a house and they think about what they want in a house – say, 4 bedrooms, 2 ½ baths, and an eat-in kitchen, etc. Then they come up with the amount that they are willing to spend on a house – say, $300,000. Then they find out where in their area they can buy a house with 4 bedrooms, 2 ½ baths, and an eat-in kitchen for $300,000 and they buy in that area.

I think they are going about it all wrong. First and foremost, find a town, neighborhood, or area where you want to live. Scout it out – during the day, at night, and on weekends. Shop at their stores, go to their parks, and check out their schools. Meet some of the residents. If you like it, great, but also look other places. If you don’t like it, find another town/area to look in. Keep looking around the area until you find exactly where you want to live. That is more important than the number of bedrooms or whether the house has an eat-in kitchen. Trust me. It is. When you find the neighborhood or town that you want to live in, find out what is for sale. Are the houses in your price range? No? A 3-bedroom house costs $300,000? Well decide how badly you need that 4th bedroom. Which is more important – living in a town you love with good schools, nice parks, and friendly residents or living in a 4-bedroom house? Personally, neighborhood always wins hands down for me. You can always change your house. You CANNOT change your neighborhood!

Now in the short–run, this won’t save you money. After all, a 4-bedroom house in a neighborhood that’s not so great or a 3-bedroom house in a neighborhood that is perfect will both cost your $300,000. But after a few years, the better neighborhood will win out. The values on the houses will rise faster. And you won’t want to move to somewhere better. By staying in one house for a long time it will save you money on moving costs and mortgage fees.

In Real Life (IRL) – As I mentioned yesterday, we had $250,000 budgeted for a house 8 years ago. My husband has a job about 30 miles outside the city center so we could have bought a nice sized house far out of the city for $250,000. Problem is, I don’t really like the city that he works in. The city’s crime rate isn’t the greatest and neither are the schools. Because there is a lot of land, the building that has taken place there over the past few years has been out of control. And the infrastructure is not necessarily keeping up with it. But my husband made me check it his work town and I agreed. And I didn’t like what I saw. Sure, the two-story foyers and the gourmet kitchens in the new construction homes intrigued me. But I wasn’t impressed by the people I met in the malls or the all of the box stores I saw on the main road into town.

We looked several other places as well, but my criteria were that I wanted to live in a town. I wanted a town that I could walk to shops, parks and schools. I wanted a town that had good schools. A town that people took pride in. And we found it a town close in the city (10 miles away) and boy were the houses expensive. As I said yesterday – A 1950’s 3-bedroom 1-bath house was about $250K. Guess what? There was a reason the houses were so expensive because lots of people wanted to live here.

Fast forward 8 years and the housing market had made a very steep climb and has come back down again. But guess what? In my town, the values haven’t dropped as much as in other places. People still want to live here. The amenities that I liked so much attract other people as well, keeping the values in check. And in the end, when we really needed that 4th bedroom, we spent only $12,000 to turn our porch into one. Not much at all. Plus it added value to our home. Those 4-bedroom homes in the town where my husband works? There are quite a bit for sale because as the housing market has declined, those that are farthest out from the city went down the fastest. If we had bought out there, we probably would not have been happy – with the schools, with the overbuilding, and with neighbors in dire financial straits. We probably would have ended up wanting to move and we would have added one more “For Sale” sign to the block. Buy the neighborhood first, and the house value will take care of itself. You won’t be sorry.

Buy Less House Than You Can Afford

#4 Saving Money Tip - Buy Less House Than You Can Afford. Common practice when buying a house is to find out how much mortgage you can qualify for and then buy at that price point. But I disagree. Do you really want to be stretched so thin? Buying a house is exciting and of course you will get "wowed" by beautiful homes - those at the top of your budget and those above your budget. But it won't be much fun to live in a house that you can just barely afford. Or to live in a house that you cannot decorate or to not be able to go out to dinner once in awhile. And if you're young and buying a house before you have children, consider what you plan on doing if you have them. If one of you wants to stay home when you have kids, then you definitely do not want to buy as much house as you can afford. Buy a house a little smaller, a little less polished.

A great way to buy a house is to see past the 1970's carpet and wallpaper. Pay more attention to the neighborhood, lot size, location, and size and layout of the house than to the decorating in it. The beauty about buying a house that needs cosmetic changes is that you can make them when you can afford them. Ripping down wallpaper is tedious, of course, but it's something that can be done pretty cheaply. Same with paint and carpet. Another reason to buy less house than you can afford is that you really don't know what the future will bring, and it's better to have a cushion of money than not. And if by some stroke of luck or hard work you find that you have more money than you thought you would, you can always add on, move, remodel, etc. Too many people, however, buy as much as they can afford at the time. Then down the road one of the couple loses a job or the wife wants to stay home with their new baby but they cannot afford to. This is a position you do not want to be in. If you plan ahead for these types of unforeseen circumstances by buying less than you can afford, then you will have more freedom in what you can do with the extra money. And if you find you need the extra money to pay your mortgage, at least you will have a roof over your head.

In Real Life (IRL) - My husband and I (no kids) bought our house 8 years ago in a fairly expensive city. My husband was new to the area so he was shocked at how expensive homes were. At the time, a small 3 bedroom 1 bath 1950's ranch home was in the mid $250's (which now seems awfully cheap, actually). We qualified for a house well over $300K that probably would have had 4 bedrooms, but I was hoping to only spend about $250K. Problem was, while we were satisfied with only 3 bedrooms, we wanted a 2nd bathroom. Most of the houses we looked at did not have a second bathroom or it was in the basement. We looked and looked in our price range but could not find one that met this criteria. So finally we did what most people do, we looked at higher priced homes - those up to $300K.

Okay, so we did what I'm telling you not to do and that's why this section is called IRL. Well of course you can guess what happened we found our "dream" home. It had 3 bedrooms, and not 1 bath, not 2 baths, but 2 1/2 baths! Oh and it was priced at $309K. And I did what all real estate experts tell you not to do - I fell in love with the house and I made it mine mentally before it really was mine. But back to the point of buying a house with 70's wallpaper. We were lucky, this house, while on a beautiful lot on a quiet cul-de-sac with more than 1 bathroom was decorated, well, not so good. One room was painted a bright red and I mean bright almost fuchsia. Another had loud blue-flowered wallpaper. And there was no furniture in any of the rooms to show how it would look furnished properly. For some reason this lovely home with not so nice decorating had been on the market for weeks (which was long for that time period; houses were selling very quickly) and had not received one offer. So we low-balled them with an offer in the $250s which of course was rejected. But after going back and forth we agreed on a price of $290K! $40K above my target price, but remember it was less than we qualified for. And we still did have a cushion of money. We had $90K saved up to buy a home and only used $70K for the down payment. That $20K went to an emergency fund and is in fact still sitting there.

We were lucky, not only because we bought when the market was a bit lower than it is now, but because we found a house that needed cosmetic changes that other potential buyers poo-poohed. After we had a contract, the interest in our house grew and others wanted to buy it. It took them a little bit longer to see past those ugly red walls and that blue-flowered wallpaper. Looking back it was one of our best purchases. Because we paid for the neighborhood - a nice lot on a quiet street. That stuff doesn't change. The rest? The red paint is now beige. The blue wallpaper is still there - when we put our furniture in it, it didn't looks so bad. And that 3-bedroom house that was smaller than the 4-bedroom house we qualified for? We decided to turn our porch into a fourth bedroom when we found out we were having our 3rd child last year. Because we bought less than we could afford, we were able to save money each month and put it away. This afforded me the luxury of staying home with my children when they were young. So even though we went above my preconceived budget, we did buy a house less than we qualified for. We knew we had emergency money and we planned on me staying home if we had children. And because we bought a smaller home, we were able to do all that.