Updated post: 3/3/24
Original post: 8/21/22
How to Budget When Your Spouse Won't: Part 4 of our 10 part budgeting series
We are going to begin with a fun five-question quiz. The answers and explanations are provided throughout this post. No peeking!
The average home price in the United States in 1991 was $120,000. According to the Case-Schiller Index, how much would that home be worth today?
Less than $120,000
$120,000-$240,000
$241,000-$482,000
$482,000-$964,000
What would be more valuable, a $120,000 home purchased with cash in 1991 that sold today or a one-time $120,000 invested in the S&P 500 Index Fund?
Home
S&P 500 Index Fund
If you invested $120,000 in the S&P 500 Index Fund in 1991 and never invested another dollar, what would it be worth today?
Less than $120,000
$120,000-$240,000
$241,000-$482,000
$482,000-$964,000
On average, how much is owed in property taxes in the United States on the average cost of a new home in 2022?
$500-$1,000
$1,001-$2,000
$2,001-$4,000
More than $4,000
What is the most valuable asset owned by the average American?
Home equity
Stocks
Bonds
Mutual funds + stocks + bonds
The United States housing world has been a roller coaster over the past 20 years. During this time, we have experienced a housing market collapse which ignited a financial crisis followed by an uncanny hot housing market ignited by the craziness of Covid. Homebuyers and sellers could have bought and sold their homes at the opportune time, walking into a bargain or at the wrong times. In other words, luck and timing have a heavy hand in the type of home you can afford to rent or buy.
Buying a home at the wrong time will lead to compounding financial problems.
Several hidden financial costs accompany purchasing a home. American Family Insurance recommends budgeting about $1 for every square foot of livable space yearly for annual home maintenance costs. In other words, a 3,000-square-foot home may cost you, on average, $300 a month to maintain.
When an asset is liquid, it is easy to convert to cash, and an illiquid asset is hard to convert to cash. A home is illiquid compared to investments in the stock market or money in a bank account. In the years following the housing collapse in 2008, 1 in 4 homeowners were underwater, which means the home is worth less than the homeowner owes.
Also, consider that the average cost of homeowners insurance for a $250,000 home is $1,383 annually, and the average cost of property taxes for the average price of a home purchased in 2022 ($348,000) is $3,863, which is the answer to quiz question #4. The burden of property taxes does vary significantly across the country. Use the Tax Foundation interactive map below to see for yourself
You could argue that the most crucial consideration in purchasing a home is the location. Your proximity to work and safety are top priorities for many.
When public school parents purchase a home, they are also deciding where they want to send their children to school. There are significant inequities in how schools are funded across the country, which puts pressure on parents to consider the quality of their neighborhood public schools.
Related reading: Where Should We Live? – 15 Factors with Resources to Help Newlyweds Decide Where to Live
Is a home an investment?
In my opinion -- no! This is the most common misconception in asset accumulation. I'm not suggesting that home ownership is a bad thing. We own our own home, but I do not allow our financial planner to include the equity in our home on our net worth statement.
The rich own financial assets while the rest of the population has most of their net worth tied up in their home. To be specific, the equity in their home.
Equity is the difference between the current value of the home and what is owed. According to Experian, total mortgage debt in the United States reached $10.3 trillion. Have a look at the net worth data compiled by Wallet Hacks:
Owning rental property and investing in financial markets comes with significant tax benefits when using the proper tax-sheltered investment products (e.g., 401k and IRA).
Homeownership can come with some very modest tax benefits that are typically far less than what is owed in property taxes.
If you consider the home you live in as an investment, your investment is gobbled up by the cost of property taxes, home insurance, and maintenance. At the same time, investments in the financial markets can grow tax-free on many occasions. And let's not forget the outrageous transaction costs of buying and selling a home… 6% on average!
This leads us to the answers to the remaining quiz questions.
The average home price in the United States in 1991 was $120,000. According to the Case-Schiller Index, how much would that home be worth today?
The answer is $440,847, which does not include the dollars gobbled up from property taxes, maintenance, and homeowners insurance.
Your financial life in a spreadsheet, automatically updated daily. Build your budget, now.
What would be more valuable, a $120,000 home purchased with cash in 1991 that sold today, without adding any upgrades, or a one-time $120,000 invested in the S&P 500?
The answer: S&P 500 Index Fund
If you invested $120,000 in the S&P 500 Index Fund in 1991 and never invested another dollar, what would it be worth today?
The answer: $1,371,267 – which is triple the return of a home.
Perhaps you're not sure whether you should rent or buy a home. Here is a checklist to consider:
Here are the pros and cons of owning and renting a home.
Countless considerations go into buying or renting a home and what home to choose. Folks should make an informed decision that prioritizes financial concerns, but the only person who would know the best choice for you is you.
When you plan a budget with your spouse, you are not budgeting with Excel or other tools such as our Budget Template for Couples. You are using these tools. You are budgeting with someone you love and share your life with.
Our free Budget Template for Couples is designed specifically for couples. Each category includes linked graphic-centric short videos to help couples in the budgeting process, providing essential prompts to consider budgeting each categorically appropriately.
This 10-part series is dedicated to helping you work with a spouse to budget together and provide the information you need to make educated decisions with your dollars.
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