Transcription
At some point in your life, you will make a single financial decision that could be the difference in millions and millions of dollars. And that decision is where you choose to live. And I don't just mean what city or country, although that is important too. But I also mean whether you buy or whether you rent, and how big of a house you buy or how small of an apartment you rent.
So, this video covers everything that you need to think about, from choosing where to live, whether you should buy or rent, how I find my apartment and save over $10,000 per year, and how I'll spend half as much money in retirement as I do right now. And if you're new here, my name is Charles, and I use this YouTube channel to help regular people reach financial freedom and to document my own journey to financial freedom before I turn 30 years old. And to do that, I obviously have to be really, really careful about making big financial decisions. So, when I was doing a little planning and number crunching, I realized just how insanely important this single financial decision is.
So, let me explain what I mean, because this single financial decision could be the difference in an over $4.4 million net worth. And to explain why, let me talk about three different scenarios.
Scenario one is expensive Eric. This apartment building right next to my office has two-bedroom apartments going from $4,000 to $6,000 per month. If I really wanted to, I could afford a $4,000 a month apartment. I would never actually do that, but I could afford it. It definitely wouldn't be advisable, but that would be a little less than 50% of my take-home pay. So, for the sake of having nice round numbers for the math, let's assume $4,000 a month exactly in rent. After 30 years, expensive Eric would have paid $1,440,000 in rent. And by the way, right now I'm ignoring inflation just because I don't want it to get even more complicated. So, Eric would spend $1.4 million over 30 years on rent.
But to see whether that's good or bad, we really need to compare that to scenario number two, homebuyer Herald. Where I live, the average house costs over $1 million. There are units that cost less than $1 million, but almost all of them are condos, which have more expensive fees associated with them. But for simplicity, I'll assume you can buy a house for exactly $1 million. Again, this is well under the average for the area. Assuming a 20% down payment and a 7% mortgage rate, which is what mortgage rates were when I made this video, then you would be paying $5,695.44 every single month on your mortgage. After 30 years, you would have spent $2,051,711.90. If you include the down payment, that's a lot more money than you would have spent in the renting example, even for a very expensive apartment. And plus, to make matters even worse, buying a house requires a lot more upfront money. To put a 20% down payment on a $1 million house, you need to have $200,000 in cash.
However, what makes this option a lot better is that after 30 years, homebuyer Herald owns a $1 million asset. If you subtract that from the total cost, then homebuyer Herald didn't really spend $2.2 million; he really spent just $1.2 million. So, homebuyer Herald spent a lot more money than expensive Eric, but at the end of 30 years, homebuyer Herald actually has $200,000 more. And those savings will only become even greater now that the house is paid off.
But let me show you one more scenario. Scenario 3 is cheap Charles. This is closer to what I'm doing, which is why I named it after myself. Because instead of living in a super expensive apartment or buying a $1 million house, instead, I decided to find cheap deals on a site like Craigslist, find a cheap townhouse owned by a private owner, and to live with roommates. And that means that I'm only spending around $1,000 a month. And by the way, if you are interested in how much money I spend on housing and on everything else, I put a free guide in the description that breaks down my entire annual expenses. But assuming $1,000 a month for rent, then after 30 years, I'll have only spent $360,000.
But here is the really, really important part. Because I'm spending so much less money than everybody else, I can take all of those extra savings and invest them. Compared to expensive Eric, I can save and invest an extra $3,000 a month. Assuming a 7% return on investment, that turns into $3,583,654.20 after just 30 years. And compared to homebuyer Herald, I can save and invest even more. Sure, after 30 years, homebuyer Herald has a $1 million house. But if I saved and invested the difference between what homebuyer Herald spent on his mortgage every month and what I spend on my rent every month, then at the end of 30 years, I would have $5,492,926.40. That's a $4.5 million difference.
This is why where you choose to live is the most important financial decision that you will ever make. Where you live could be the difference in over $4.4 million. So, my real hope is that the rest of this video helps you save millions and millions of dollars.
And the first thing we need to talk about is where you live in the first place. And while this is a little counterintuitive, it's actually better to live in a more expensive area. It is true that housing in big cities is usually extremely expensive, but what's important is that income is generally proportional. Now, this obviously doesn't always hold, but it is true that there is no way I'd be making as much money as I am now if I wasn't living in one of the most expensive and priciest regions of the world. So, think about it this way: if you can only save 10% of your income no matter where you live, then wouldn't you rather live in an area where 10% of your income is a lot of money? It might not make a difference in your quality of life right now, but it could make a big difference later on. So, that's one of the reasons that I moved to an area where the average income is about $115,000 per year. Again, that's the average income. Even if you don't save a super high percentage of your income, you could still be saving a lot of money.
And here is why this is so important: you can always move later. I would much rather save 10% of a $100,000 income and then move to an area where the average cost of living is just half of that. That is a whole lot easier than saving 10% of a $50,000 income and then trying to move to an area that is twice as expensive. That is very difficult. So, if you do get to pick where you go to work, living in an expensive city is a whole lot better.
But not everyone has a lot of choice. You might already know where you're going to live, or you might have to move somewhere for work. And that's fine. The rest of this video will still help you save millions of dollars, because no matter where you end up living, you have to make the decision on whether to buy or whether to rent.
So, let me explain why I plan to rent for the rest of my life and how to make this decision for yourself. As I've already said, the area that I live in is not cheap. And since the average cost of a home here is over $1 million, the truth is that buying a house when I first moved here just wasn't even an option. I probably would have needed a down payment of over $100,000, which I did not have when I was just starting my career. But even now that I could afford a down payment on a house, I still decided not to. And that's because I'm still very early in my career. I don't know how long I'll be living here, but I don't think it's going to be 10 years. And not only does renting give me a lot more flexibility in the short run, it also does give me a lot more money.
Because buying a house is actually really expensive. There's realtor fees, there's closing costs, there's any repairs or upgrades, and whatever else. There's a lot of those costs that are front-loaded when you first buy a house. This might make sense if you're going to live there for a very long time, but in the short run, it might not make a lot of sense. And even ignoring all of the extra expenses of buying a house, even putting down a down payment is a huge opportunity cost. If I'm only going to be in the area that I am now for a few more years, I would much rather have my $200,000 invested in the stock market than stuck in a house that I'm just going to sell.
And the last reason that I'm renting instead of buying is because, in all honesty, I'm just lazy. Frankly, I just don't want the responsibility of owning a home right now. I don't want to be doing lawn care on the weekends or fixing plumbing issues whenever they come up. I'm way too busy making all of these YouTube videos for you. So, maybe one day I'll just love mowing my lawn like a stereotypical suburban dad, but right now, I am definitely not there yet. So, truthfully, I'll probably rent forever. There is a chance that I get to a point in my life where I really want to settle down for a very long time, and maybe it will make sense to buy a house then. But right now, I really value the flexibility. And after all, this is a big reason that I'm trying to reach financial freedom in the first place. I like having all of my options open, and I don't think that's ever going to change.
So, this kind of illustrates the things you need to be thinking about if you're deciding between buying or renting. There are some real benefits to renting: it is much more affordable if you're just starting out, it gives you a lot more flexibility if you think you might move, it will make you a lot more money, at least in the short run, and it comes with a lot less responsibility.
But this also highlights when it does make sense to buy. If you're settling down for a long period of time, then buying a house can be a worthwhile investment to avoid paying rent every month. And if you don't mind working on a house, it can also be extremely valuable. In general, houses do not go up in value as much as stocks do, although this does depend on the area. But on the other hand, you can make a real tangible difference on the value of a home. Good upkeep, repairs, and upgrades can all make that house even more valuable than when you first bought it. This is not something that you can do when you own a stock; you have absolutely no control.
And there's actually another reason that it might make sense to buy a home. Buying a home is a forced savings plan. When you're paying off a house, you'll almost certainly be paying more money every month than you would be if you were just renting. And when people compare buying versus renting, they usually assume that the renter takes the difference between their rent payment and the more expensive mortgage payment and is saving and investing that difference. But the truth is that a lot of people don't save that difference; instead, they just end up spending it. So, if you aren't going to save and invest the difference between your rent payment and your possible mortgage, then it makes a whole lot of sense to get a mortgage instead. Having a mortgage will at least force you to take that money and put it towards an asset that is going to be valuable in the future. So, even if buying a house is not the right financial decision on paper, it can actually make more sense for some people who otherwise would have just wasted that money. But if you are good at saving those extra dollars, then you might want to play around with a calculator like this one to decide whether it makes sense for you.
But let me explain how I did my own apartment shopping to save over $1,500 per month. The average cost of an apartment in the area that I live in is $3,500 a month. But the only reason the rent is that insanely high is there are so many super bougie apartments that are way overpriced. Most apartments in this area are huge high-rises owned by big real estate companies instead of private owners. And every apartment has everything that you need, self-contained: that's living spaces, a kitchen, laundry, and whatever else. And they also include a bunch of random amenities to try to justify that price, whether that's a crappy gym or a cafe that you still have to pay for. I figured that almost all of that was completely unnecessary.
So, the first thing I really want you to do is think about what your actual requirements are. And when I really considered the alternatives, I realized that I probably didn't need a kitchen to myself, and I probably didn't need my own laundry machines. When I was in college, I didn't even have a bedroom or a bathroom to myself, much less a kitchen and laundry machines. So, I figured I probably didn't need that now.
So, after I figured out what I was even looking for, I did a lot of research and talked to everyone I knew who was familiar with the area that I was moving to. I was pretty fortunate that I have a lot of family in the area who was able to show me around and show me the different places I might want to consider living. And once I had a sense of what I was looking for, I went on Craigslist. You can find much better deals on a site like Craigslist than you can on a site like apartments.com. And on Craigslist, I got super aggressive about area filtering because I had very strict requirements about where I wanted to live so that I wouldn't have to own a car. This is an entire video in itself, which I'm not going to go into, but basically, I wanted to be really close to my office, my grocery store, and the gym so I wouldn't even need to own a car. This put really strict requirements on where I could live, but by knowing exactly what I was looking for, I was still able to find something that hit every box.
I have these days, I rent out a room in a townhouse for just $900 a month. Utilities take that to about $1,000 a month. But again, compare that to the average rent of the area of $3,500. Compared to the average, I'm saving over $30,000 per year. So, for the area I live in, I spend extremely little on housing.
But once I retire, I expect to spend even less. So, let me explain how, even though I spend very little right now, I still expect to spend half as much money once I do quit my job. If I want to spend half as much money on rent, we're talking about an apartment for just $500 a month. And to do that, I absolutely have to move out of the area I'm in. $500 a month is just totally unrealistic in Northern Virginia. But there are some places in America where $500 a month is probably all I would need. But even so, that would be pretty tough. I'd probably have to live in a very small town or pretty rural area. But if I moved abroad, I could live in a super nice place for $500 a month.
So, as important as it is to be very careful about where you choose to live during your career, it might be even more important to be careful about where you live in retirement. Because during your career, maybe you're saving an extra $1,000 a month by being very careful about where you chose to live. If you take that $1,000 a month in savings and invest it at 7%, then after 10 years, you have $171,000, which is pretty awesome. But if you're able to retire to an area where you need $1,000 less per month for rent, then you need way less money to retire. The super basic rule of thumb is that you need about $25 in retirement savings for every $1 that you spend in retirement. So, if you need $1,000 less per month in retirement than you do right now, then you can decrease your annual expenses by $12,000 after retiring. And that means you need $300,000 less dollars to retire.
This is why where you live is the most important financial decision you will ever make in your life. So, here's your homework. First, look at the real estate in your area. Could you save a significant amount of money by moving right now? And second, start looking at some cities that you might be willing to move to in retirement. Would moving significantly reduce your expenses and help you retire faster? This can make a huge difference, and it's actually a big reason that I expect to be able to retire when I've saved just about $500,000. If you're curious, I've worked on my own plan to retire early in this video right here. There are a ton of lessons in that video that I think will apply to almost everyone, so I hope you check it out next.