What’s the Real Cost of Wanting More?

At last it’s Springtime!  Warmer weather, the trees are budding, the grass is coming back to life.  It’s wonderful!  This week I’ve gotten to enjoy outdoor exercise every day.  Last night as I biked surrounding neighborhoods I noticed a number of luxury homes for sale so I snapped a few photos.

Real estate - Aylmer, Quebec Real estate - Aylmer, Quebec photo3

Just for fun I thought it would be an entertaining exercise to determine the cost of living in one of these houses.  After researching I found most similar houses in this neighbourhood ranged in price from $950,000 to $1,299,999 ($1,577,397 to $2,158,542 after mortgage financing at 4.5% average interest rate over 25 years).  For the most part these houses featured 5 bedrooms and 4 bathrooms and include a living room, family room, dining room and eat-in kitchen.

Let’s forget the financials for a moment and the fact that there are single family homes a few streets over for $315,000 to $399,000 ($523,032 to $662,508 after mortgage financing at 4.5% average interest rate over 25 years).  These houses have 4 bedrooms and 2 bathrooms and include a living room and dining room.

Why are we so motivated to buy bigger all of the time?  More importantly does it actually increase our daily happiness?  Does the happiness justify spending an extra $1 million to $1.5 million (which is really $1.5 million to $2.25 million in salary earned before income tax is deducted)?

I know the answer for me, but I can’t answer this question for you.  You need to stop and think for yourself.  Think about how does a larger house make you happier?  What does it give you that a smaller house does not?  Other than something luxurious to look at is it worth the additional expenditures?

I started to make my own “pros & cons” list and I urge you to do the same…

Pros Cons
More bedrooms Significantly higher monthly expenses
More bathrooms More home maintenance & repairs
One more place to eat (eat in kitchen) More furniture required
Larger yard More cleaning
Higher luxurious fit and finish Larger lawn to cut & more landscaping

These larger houses are beautiful and luxurious, but even with an incredibly large family the less expensive houses undoubtedly fulfill the same requirements.  Marble countertops, cherry wood staircases and elegant wainscoting are pretty to look at but do they really increase your actual happiness?  On the contrary, physical possessions tend to entrap people to a life of work and in most cases don’t even increase happiness marginally.

Let’s look at the true cost of the house above… we’ve got the cost of the house ($1,299,999) and the mortgage interest ($858,543).  But we’re not done yet!  In order to pay $2,158,542 to purchase this house, one would need to earn approximately $3,021,959 in income to purchase this home – don’t forget every dollar you earn is taxed!

Cost of house $1,299,999
Mortgage interest $858,543
Taxes on income $863,417
Total Cost $3,021,959

What does that amount to over the course of 25 years?  A monthly expenditure of $10,073.20 of pre-taxed income for the more luxurious house.  The alternate options cited above of $399,000 would result in a monthly expenditure of $3,091.70 of pre-taxed income.  If you were to choose the latter and save the $6,981.50 each and every month and invest it in the stock market earning you the historical average of 10.1% (8.7% adjusted for inflation) you would save $1,363,915.15 in just 10 years!  This would result in a dramatic lifestyle change.  Without saving another single penny each and every year thereafter you could withdraw $54,556.61 purely for enjoyment or retirement purposes based upon the 4% rule!  Oh and guess what?  We haven’t even considered the fact that the larger house will have higher property taxes, insurance costs, heating and electricity bills, maintenance and repair costs, furnishing expenses and the list goes on and on!

I’m not trying to tell anyone what the best choice is.  For me it’s an easy decision, but, I realize everyone does not wish to retire early.  Now the rest is up to you.  What do you want?  What makes you happy?  Now that you are faced with the true costs of a bigger house, does the increased happiness justify giving up early retirement?  Does it also justify giving up monthly returns that would enable you to travel around the world without ever spending a penny of your savings?  Time for you to decide.

Brent Mondoux
Founding Partner, Amplified Investments

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