Updated: Jul 8, 2021
Managing your lifestyle is all about making smart choices. Each lifestyle decision you make, from your choice of a home, to what you drive, to how you spend your leisure time, has an impact on your overall financial situation. We’ll take a look at how smart strategies can enhance your lifestyle while at the same time potentially freeing up assets to invest for the long term.
Maslow's Hierarchy of Needs As we approach lifestyle choices, it is useful to take a look at Maslow’s famous “hierarchy of needs” diagram. In his landmark 1943 study, Maslow placed lifestyle choices on an ascending scale of importance—from basic needs to peak experiences—that bring emotional satisfaction. Approaching our lifestyle choices in this way can help us separate our needs from our wants. After the basic needs of food and water comes the category of shelter. Our home represents one of our basic needs, and the type of home we choose also potentially fills other needs higher up on the pyramid, such as self-actualization. Source: Abraham H. Maslow, “A Hierarchy of Needs,” Psychological Review, 1943 Structuring a Mortgage If you own a home, making good choices with your mortgage is critical. One of the first considerations is whether to take out a 15- or 30-year mortgage. A 15-year mortgage is structured to pay off your loan quicker, but the payments are likely to be higher. A 15-year mortgage also means you’ll pay less in interest over the life of the loan. If you can afford higher payments, it may be worth considering. You also may have a choice between a fixed- or variable-interest-rate loan. If you select a fixed-rate mortgage, you’ll lock in a specific interest rate for the life of the loan. If you select a variable-rate mortgage, the interest rate may fluctuate based on a financial index. As the index adjusts higher or lower, your monthly payment may change. Which mortgage approach makes the most financial sense? Largely, the answer is going to depend on your individual situation. Some people want to aggressively pay down their loan, so a 15-year mortgage may make the most sense. Some people prefer to lock in on a mortgage payment, so a fixed-rate loan is the more appropriate approach. Our firm suggests you consider understanding the pros and cons of all mortgage loans as you evaluate different choices. Just for fun, let’s take a look at the highest priced home listed on Zillow today. This home is on Bel Air Road in Los Angeles, California. It hit the market in 2018 for $188 million. But what would it really cost to own? We’ll use this extreme example to illustrate the real cost of home ownership. Let’s start with the mortgage. Let’s say that you put a 20% down payment on a $188 million home. With a hypothetical 4.75% interest rate on a 30-year fixed mortgage, the payments would be $785,000 per month, $9.4 million per year—that’s roughly 154 times the national median income. This would result in about $132 million going toward interest over the duration of the mortgage. If we estimate another hypothetical 1.25% of the price of the house for taxes, and 1% for insurance and upkeep, we can estimate that this house will cost more than $13 million per year to own and maintain. A $9.4 million monthly mortgage and $13 million annual cost are outrageous; but the principle remains the same. Every asset has an opportunity cost: what the money may have earned elsewhere. Sources: Zillow.com, November 26, 2018; Census.gov, 2018 In Your Home: Dollars & Sense The home is not only a significant asset, it represents a significant part of our lifestyle. Where and how we live is meaningful on many different levels. Our homes are reflections of who we are, and so the decision of how much home we want—or need—may vary with each situation; it is not strictly a financial decision. However, the financial component of the decision should be considered thoughtfully. For example, the cost of maintaining a large home might be put toward activities that better fit your desired lifestyle, such a travel and hobbies. Others may find that a large home still meets their needs. The days when we could expect our homes to steadily increase in value may be behind us. So a decision about housing has grown more complicated. Upside of Downsizing Let’s follow a couple through the lifestyle choice of home ownership. In this case study, Ron and Cindy own a $500,000 house. They’re both turning 55, and since their children are no longer living at home, they’ve decided to downsize their home. Since their equity in the home is $300,000, they’ve decided to pay cash for the new home. No more mortgage payments. Here’s one of the keys to their decision: they’ve decided to put the extra $50,000 into an investment, which they anticipate may earn a hypothetical 6% rate of return. In addition, each month, Ron and Cindy intend to invest the money they save on a mortgage payment—$1,604 a month—in the same investment, taking advantage of dollar-cost averaging. If the investment has a hypothetical 6% average annual rate of return, after 20 years their balance could be expected to grow to more than $900,000. Keep in mind that dollar-cost averaging does not protect against a loss in a declining market or guarantee a profit in a rising market. Dollar-cost averaging is the process of investing a fixed amount of money in an investment vehicle at regular intervals, usually monthly, for an extended period of time, regardless of price. Investors should evaluate their financial ability to continue making purchases through periods of declining and rising prices. The hypothe