Too much house – biggest personal finance mistake

Do not spend more than you earn. Everyone knows this.  The one exception is your home. Not an investment home, but the personal house you will live in. You of course need a mortgage. But the biggest mistake people make is their eyes get too big when purchasing a house. A big home is a financial mistake and in my mind a sign that you have an ego problem.

You need to be in a financial positive to maintain a positive cash flow over a lifetime. This is real security. Learn the economic lessons others are paying for with their life savings when their house is foreclosed on.

I believe in the cash flow theory of security. In fact, I use to have a bumper stick in my room as a teen, that said ‘happiness is a positive cash flow’. I am writing this not out of arrogance or I know better, but because I personally see people’s lives destroyed by big homes. A rich man is one whose income exceeds his expenses, whatever that level of income is.

The biggest mistake people do is too much house. If you take out a 30 year mortgage you cannot lose your job for 30 years or at least need steady employment. In today’s, economy that is not real. In the old days you could just sell the house and pay the mortgage if you were in trouble. Now you are in trouble as home prices are going or at least flat.

Sell your house to pay off the mortgage is true today only if you bought your home ten years ago in many cases. In fact, the US housing market might not really start to take off for another ten years. But today there is still deflationary pressure on the housing market with no end in sight. Even if the economy recovers, the secondary housing market is a lagging indicator like unemployment and it will take years before some markets start to show life. The only hope for home owners is inflation.

Therefore, it is the biggest mistake someone can make financially, buying too much house. Big homes are a mistake.

Why I have no debt

Me, I have zero debt. Never had any. It sounds crazy right? Americans believe in debt or at least a mortgage. In contrast, in Poland where I live now, people often build homes with cash. They build more modest homes, but they do it over ten years an pay cash. Once they have it, it is theirs.

I am not saying it is better, rather, if you step back from the whole process, objectively you do not need to buy a big house with a big mortgage. In fact, I might take out a mortgage this year, I am considering it. But if I do it will be for a very modest size house. I would rather pay it all in 5 to 15 years and have a small house all my own, than a large house which the bank will end up owning. I am not greedy. I may be an unrepentant capitalist but I am not greedy.

Big homes equal big ego

Maybe I am casting judgment too hard, but look all the movie stars that have multiple large homes, just because they can. For me it is a waste. I would rather be like Warren Buffet, who lives in the same modest home he was married in in 1959. I am from preppy New England. I see the large homes from Avon, CT to Lexington, MA with 4,000 square feet. I only scratch my head and ask why would anyone need that big of a house, except to build walls from their own family.

Often when people get really rich, they just buy a modest condo in Florida. Only egomaniacs need a super sized home.

Why do you need a large house anyway?

Besides heating costs and other maintenance it makes families distant and cold. A big house is for show.

When I was growing up in the USA, the average home size was 1,400 square feet. Now it is 2,500 square feet. Now I live in Poland, I would say the average here is about 650 square feet. A generation ago it was 300 square feet. Witnessing these differences myself, I would not say kids grow up happier in larger homes than smaller homes. In fact, I would say the converse is true. When you grow up like my father did, with eight people in two rooms or my wife did with seven people in two rooms, the family tends to be very close and stay close their whole life.

When teenagers grow up in a smaller house, instead of having your own room to escape in and lock the door, you teach your children chess or read books and spend more time with them. This is what my wife’s family did. You could argue, except for your ego being pumped when you compare yourself to you neighbor a large home is bad for your family.

Small rooms = great minds | big homes = consumers

Even today, my own family, the three of us, we live in about 700 square feet apartment (renting is only bad in a boom market). My daughter at 2 years old is learning three languages, English, Chinese and Polish and is learning chess as her forth language. In such relatively small quarters in a cold dark place like northern Europe where you are inside 6 months of the year. What else is there to do but interact and use your imagination. Better than saving for her university education, I would rather spend time with her now. I am not poor, mind you. Nor am I cheap. I would rather stash cash away and invest it. We might build a house this year but again it will be very modest.

small homes are better

My 2 year old and I playing chess on the floor of our small apartment in Europe. If we had a big house there would not the same interaction. She would have a play room all to herself. Here on the other hand, we play on the kitchen floor, but at 2 she is playing chess. By default I spend more time with her. She is very happy to have daddy in arms reach all day.

Think of all the great minds that from Mozart to Einstein that grew up in small houses. In contrast many rich and famous kids never amount to anything more than consumers.

Big rooms make people’s minds small – Leonardo Da Vinci

Today people buy big houses and I do not think US kids are happier than Polish kids at all. In fact, when I read the high percentage of US kids on medication such as anti-depressants etc I wonder what is going on. When I read about the high level of divorce in America, something not found in places like India or Poland or Romania, I wonder why?

Maybe house sizes is even slightly inversely correlated to happiness. Or at least there is an optimal size, rather than bigger is better. For most families between 1,000 and 2,000 square feet is more than enough home.

A better solution is do like the Europeans, live in small houses but take six weeks of vacation, traveling with your family. I mean families in relatively poor Poland take a couple of vacations a year with their kids. If I was a kid, I would rather have the experiences of walking through the old ruins of ancient Rome , or seeing the old town of Montreal with my family than living in a foofy house.

If you are an investor and are buying a house as an investor to fix it up or part of your investment strategy this is of course a different story. But I am talking about a personal financial decision, not a business decision.

Therefore, for your personal finances and your personally life do not buy too much house. Big homes are a mistake.