Saturday, March 8, 2014

Rent, Grow Rich, Be Free

I recently shared my formula for uncovering the difference between your needs and wants and today, I'm sharing a relevant personal story.

 In 1994, my husband and I built a fabulous home on a seven acre farm. We constructed a huge barn and filled it with critters and big boy toys.
Each weekend, we'd have a mile long to-do list: we'd plant more trees, paint fences, weed the garden, remodel. Our housekeeper spent half a day each week cleaning our home-- despite the fact that the two of us occupied only half of our total living space.
One financially reflective day in 2003, I calculated the total cost of living in our home. Due to our sweat equity, our mortgage balance was very low ($120k with monthly principle and interest payments of about $855), but once I added property taxes, insurance, maintenance and, especially, lost opportunity costs (home equity not available to earn money), it became very clear that our shelter "need" was costing us too much in life energy. The total cost for living in our home, including lost opportunity costs, was an astounding $60,000 that year.
That day was a turning point in my financial life. We discussed our options, sold our home and became renters. I took our home equity and invested in a well-diversified equity portfolio.
Our net worth blossomed exponentially. Some might find it ironic, but the day I officially became a millionaire, we were renting a small apartment.
By downsizing into a rented apartment, we had replaced our previous $60,000 annual shelter expense with one costing $9,000 per year. This huge reduction in spending quickly accelerated the growth of our net worth.

Our downsized move saved on other costs, too: the clubhouse, swimming pool and exercise room eliminated the need for our health club membership; our utility costs dropped dramatically; and our commute was shortened, cutting car transportation expenses.
The benefits were more than financial-- we enjoyed our first taste of freedom. We'd wake on Saturday morning with no to do list: no mowing, no repairing, no cleaning, no sweat. We'd sit smugly on our patio, enjoying our coffee and newspaper, watching the property management's landscaping and maintenance crews busy at work.
We chose to move into a house when we adopted our daughter. Currently, we rent a nice family home located across from a large neighborhood park. Compared to owning our previous house, our annual savings is about $44,500. How long do we plan on staying here? As long as our property manager comes when we call and no yappy dog moves in next door.
Important Update: Welcome! If you have arrived here via Lifehacker, Mental Floss, or are jumping into this conversation without any additional background information, you MUST read the following posts to completely understand the point of this post. Additionally, please read the information I offered in the comments sections.
In Rent vs Buy: The Hidden Cost of Lost Opportunity, I explain why it was so costly, despite my mortgage payments being so low, to own my house. In a nutshell, lost opportunity cost is defined as the cost of something in terms of an opportunity forgone and the benefits which could be received from that opportunity.
In my post I Get Richer As A Renter, I directly compared apples to apples, using a comprehensive rent versus buy calculator, on one typical home. The calculator reported, "Your home purchase does not breakeven after 30 years."
Finally, in Dispelling The Myth That Home Ownership Is Your Best Investment, you'll find answers to common questions and objections.
Additional resources comparing renting versus buying:
The Motley Fool: The Worst Investment Ever
MSN Money (by SmartMoney): Why rent? To get richer
Priced Out Forever: Renting vs. Purchasing
Click here to view some of my favorite books.


  1. i dont usually learn from blogs , but here i found something different

  2. I find it interesting how someone can calculate this. The only interest rate you know is the one you have on your mortgage. You have no means of predicting the profit you will get out of gambling in the stock market. Even if the mortgage interest rates are low now, the interest rates for whatever you are trading with are equally low. Add in fees and you are probably at not much profit from investing the house money instead. Every supposed financial guru will tell you to keep your housing costs down and not put your money into buying a house or car you cannot even affort and that owning a place also comes with maintainance costs. Everyone with a little experience and a deflatable ego will come to the same conclusion. The huge difference though is that your money and responsibilities are freed. As you said, sitting there, drinking your coffee, not worrying about what has to be done or what will happen if most of the income is gone one day and how you would be able to keep the house then is huge on the nerves. Was it wise to sell such cheap land and huge house? Very likely not. It was silly to build such a huge house for just two people, but it could have been put to good use other than just living in a few rooms and painting fences and having boy toys in the shed. With that past living style, which must have also shown in other spendings, I cannot imagine how you ever worked up to becoming millionaires. I simply can't. A huge land and a huge house for so little money and all the rich people extras in it came from dogsitting and working as a plumber? How much did you get from your parents or won in the lottery or whatever helped you to make this possible? Besides, I still say that without having a husband who you agreed with on to work towards the rich life, put having children off, and always working together on the goal, you could not have made it. You are a lucky woman who tried and won. Not more and not less.