Wealth Management & Financial Planning

Wealth Management & Financial Planning

Underestimating the Cost of Home Ownership

In the interest of honesty and fairness, know that I wish I had written this post 13 years ago when building a home – or read it from someone else who had.  Surely, there are plenty who had, but it wasn’t anything that hit my radar or went looking for. I say these things because it would have been far better to learn in advance from others’ familiarity as opposed to learning from my own experience.  My suspicion is that some of these thought processes could help some young folks in my middle-aged shoes.

The financial aspects of buying (or especially building) a home is easily consumed by determining whether or not the monthly payment fits into the budget. Hopefully, consideration of an escrow payment for taxes and insurance are factored into that monthly payment for the mortgage. A recent Gallup poll found that only about one in three Americans actually write out their budget! We can stop here and say that if you aren’t a household that does, then know: a) you have tons of company, but b) getting your figures down on paper and tracked will go a long way to stacking the odds in your favor.  Whether you have a formal budget or are just “winging it”, there’s a good chance that when first making the jump into home ownership that you are stretching the budget quite a bit to make it work. That’s okay and natural to have some overly positive assumptions on your future and growing incomes.

The problem is what we leave out in terms of future home maintenance and upkeep; we at least vaguely understand this concept. However, the sooner we bring this vagueness into the light – the better off we will be.   It’s especially easy to keep these notions in the back of our mind when we are building because everything is likely brand new.  Here are some ideas to bring out the concreteness of how the upkeep of a home will unfold.

The average furnace will need replaced after 15 to 20 years and air conditioners within 10 to15, based on data from This Old House. Here are some other average appliance lifespans from Mr. Appliance Expert Alliance Repair:

  • Refrigerator: 14 years
  • Washing machines: 12 years
  • Dishwasher: 12 years
  • Microwaves: 8 years

These are just a few of the examples of the larger ticket items that wear down over time. Of course, you also have furniture, paint and carpet that will need updating as well. The punchline here is that over the course of 20 years, you will pretty much need to address all of these things. Before this strays into being a home improvement blog, here are some simple and practical financial steps.

Create a second bank account and as soon as possible, begin sweeping in these long-term costs of upkeep into it. You can do this with a separate savings account or even an investment account if you are starting early.  Some banks make it easy to hold separate virtual accounts all under one umbrella (PNC Bank and Capital One both have great options).   Simply come up with the best list you can of these repair or replacement items on a timeline of when you would expect to replace them, and then assign an estimated price tag of what the item would cost you in your area and in your situation. This list won’t be perfect – things will be missed, prices will be off and very few of your appliances will turn out to be average. But, by having a plan you are expecting the unexpected and preparing yourself for the inevitable large expense. By adding up all these items on your 20 year timeline, you can then estimate how much you could set aside each month to pay for your potential future repairs.  Here is the kicker: the sooner you start, the more interest and earnings can work in your favor towards funding your goal!   Yes, it’s a stretch to incorporate this second escrow-type account right off the bat when you have already stretched to get into the house.  Just know, the earlier the better.

Many people are good savers and will establish a reserve of sorts to handle the unexpected. My recommendation is to compartmentalize these reserves to the best of your ability.  You don’t want to be overly confident in your concreteness because you can’t account for everything in this sometimes cruel world, but I believe the thorough planning will give you extra confidence that you are saving the right amount.

Is the thought of dropping a couple hundred dollars each month into a reserve account overwhelming and just not realistic?  Don’t despair, get creative.  Maybe in your case, it’s as simple as dropping a quarter in a jar each time you use your washing machine – just like you would at the laundry mat.  Adjust your thermostat and put a $5 bill in the jar. These are great reminders that there are some constant expenses to home ownership.  Your $500 dishwasher doesn’t just die one day, it wears down a little each time you use it.  In a sense, the money you are setting aside aren’t savings per se, it’s simply contemporaneously funding future expenses.

We don’t all have a 1950s expectation of living in the home we are buying for 20 years. I get that. But, if you do have some expectation for an extended stay, hopefully this will provide some food for thought to alleviate financial hurdles for your future self. I have built a simple spreadsheet to assist with this process and help estimate what we need to be putting away to save ourselves future heartburn.  I would gladly share this with you…all you have to do is ask. Email me at aharter@yourlifeafterwork.com and please call if necessary to make sure your email didn’t get caught in spam (800) 928–4001.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see our Disclosure page for the full disclaimer.

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