Goldilocks Housing

I'm a fan of renting, plain and simple. Not only do I believe over the coming decades an invested renter will be financially much better off than a homeowner (mostly due to the stretched economics of the housing market), I believe that renting leads to choices that drastically improve lifestyle efficiency.

I call the big one Goldilocks Housing. You know... not too big, not too small, just right?

The Long Haul House

When a person buys, they are best off buying a house where they will stay in for a long time. Remember: flipping, upgrading, or downsizing is a good way to give away your wealth. Buying and selling real estate is only good for the middlemen. Real estate sellers especially. But also your mortgage seller, your lawyer, your surveyor, the property inspector, your municipality, your province, and others who make a living off the trading of real estate. It's an expensive commodity to play with.

Naturally, people tend to buy as much house as possible. A house you can raise a kid or two or three in, a house in which you can entertain a million guests, a house with a big backyard for the kids (and future grand-kids), a house that's cool enough to make your friends envious, and a house that mom and dad approve of.

This, however, leads to huge inefficiencies. The average household in Canada has around 2.25 persons. Yet the average newer house is around 2,000 sq.ft.! That number doesn't include finished basements, so it's likely that total finished space is even higher.

Thinking about the future means most couples will buy large 3 or 4 bedroom houses. But... in an average 65 year adult life, only around 25 years are likely to have more than two people living in the place full-time.

Trading houses is a good way to transfer your wealth to the smiling folks on bus bench ads, but buying a forever house means you have way too much house for as much as two-thirds of your adult life. You're paying too much to heat, electrify, furnish, maintain, and upgrade space you don't need.

Upsizing & Downsizing Makes You Poorer

If you choose to change houses at these different stages of life, you are also behind. It means you will sell a property at least twice and buy three times. While buying typically can cost about 0.75% of the property value, selling costs upwards of 5% all said and done.

The average single family home in Canada costs $632,000 today. That means buying a house costs around $4,700 and selling costs upwards of $31,000.

Apartments cost in Canada sell for $353,000. That's $2,600 to buy and $17,000 to sell.

Throughout your life-cycle, if you buy an apartment, sell the apartment, buy a house, sell the house, and finally settle into another apartment for retirement, your inflation-adjusted strict expenses based on current prices is nearly $60,000!

Not being able to invest those trading costs in a Growth/Balanced Portfolio, could make you $146,000 poorer from the time you're 25 and buy that first apartment to the time you're 55 and sell the house and move back to an apartment.

If you keep the money invested until you turn 65, that $146,000 will grow $265,000. At the 20x Rule, you threw away over $1,000 a month in reliable portfolio income because of real estate trading costs alone.

Just saving the transaction costs on those three moves nearly covers the difference in monthly rent costs versus the ownership costs of a paid off house!

Renting = Flexibility & Frugality

As a renter, I can move at very low costs with very low risk. Provided I reasonably take care of the place, I get my rental deposit back guaranteed. The utilities are already hooked up and, if I stay in the same general area, my utility account moves seamlessly from one address to the next. If not, the deposit is applied to my last bill and remainder gets directly deposited back into my checking account.

Provided you're not already addicted to housing (I was), you can be really efficient in your choices when renting. First start off with a 1-bedroom apartment. Upgrade to a two bedroom eventually for guest space or when the first kid comes into the picture. Maybe move to a reasonable sized house or duplex when more kids come. Then effortlessly downsize when they're off to college or otherwise on their own feet.

Every change comes with very minimal costs. Maybe $1,000 for direct expenses per move and that's it. I'm not heating, electrifying, or furnishing unused space. Maintenance expenses, renovations, and upgrades are not my problem.

If my place gets a little ugly over the years because of landlord neglect, I can move. Or at least suggest moving to try get the landlord to invest in his revenue property.

If you are a good, long-term bill-paying tenant who keeps the place in decent condition you'd be amazed at what your landlord will do to keep you there. Good landlords know vacancies and bad tenants cost them lots of money! If all it requires is a simple investment in their own property (which they'll probably have to make anyways to attract good new tenants), chances are they'll make the necessary improvements to keep you happy and keep your good rent checks coming in.

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Sharing Finances: Stop Fighting About Money

In previous post, I shared some stats about Canadian couples and their finances. To my amazement, a BMO survey found just one-third of couples share most of their finances. Of the majority that do not, 69% said they would start if it could save them more than $15 a month.

Well, sharing finances has huge advantages from a savings, investing, and taxation perspective. Sharing finances is also a key part of our personal success with reverse budgeting. These benefits add up to much more than fifteen bucks for us.

Aside from the $15 thing, some of the biggest hold-backs in sharing finances revolve around differences in money decisions, independence, and fear of breakups. That's not surprising at all when 20% of couples admit to fighting weekly about the green stuff. I'd be worried about independence and a break up too if I fought with my wife weekly—especially over an issue as stressful as finances.

The solution is simple: get on the same page by working together, respect each other's input, and don't get separated. Finances should be the last thing that drives relationship break-downs.

Sharing Means Less Fighting

We Canadians have a bad habit of kicking the can down the road. Our governments are famous for short-termism despite having majority governments. Our big corporations can barely look past the next quarter. Household finances unfortunately exhibit the same characteristics.

Can't save a downpayment for a house? We'll buy one with a borrowed 5% downpayment and pay it off later.

Can't save for retirement now? Maybe I'll save later when I make more; maybe I'll expect the government to bail me out.

Want a new car but have no money? I'll get a zero-down, 72 month loan so I can barely make the monthly payments.

Not sharing bank accounts, financial decision making, and savings strategies is part of this same issue. It's time to stop this pathetic cycle that will keep you poor and your relationship shaky!

We don't want to talk about finances with our spouses because it might get us upset. But millions of us admit to fighting about money every week anyways...

So why not talk about it and start setting goals: start reverse budgeting, make agreements on spending behaviour, and agree to hold each other accountable on discretionary items.

If excessive discretionary spending is an issue, set up automated savings so there's less left over to spend. If debt accumulation and being behind on bills is the problem, talk about it together and formulate a game plan to kill the bills together with a spending challenge.

Talking about finances and getting ahead of problems through planning will prevent fighting and strengthen your relationship. You will save money on fees, save money on taxes, spend more efficiently, and invest more for a better future. Less time worrying means more time to enjoy each other at our best.

There are very few people who get rich by chance or luck. There are millions of couples who get rich by working with their partners, planning the way forward, controlling their spending, and investing successfully.

Sharing Builds Trust

I believe my wife and I have a good relationship after 7 years of marriage. One key characteristic of our relationship is that we plan together, we share everything, and hold each other accountable.

After our reverse budget monthly investment contribution and payment of our mandatory expenses (rent, food, utilities, gas, insurance, etc.), what's left is free for either one of us to spend wisely as we choose. We trust each other to spend in line with our values.

Having shared long term goals and an aggressive savings plan, I trust my wife to spend valuably on discretionary things. She also trusts me to spend reasonably on my discretionary expenses.

Our savings are taken care of first, so as long as we remain debt free with our leftover spending we're both happy. However, everything is there for either one of us to see because it's still important to hold each other accountable for spending.

Comments & Questions

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Comments containing links or "trolling" will not be posted. Comments with profane language or those which reveal personal information will be edited by moderator.