Opportunity Cost: The loss of potential gain from other alternatives when one alternative is chosen.
Confession: When I said I would seriously consider downsizing our home, I was only sort of telling the truth (so much for defeating denial). Yes, I’d evaluate the costs and benefits of downsizing, but there’s no way I’d really get rid of our house, I said to myself.
Maybe that’s still true – maybe there’s no way my wife and I would leave a home and neighborhood we love for the sake of accelerating our savings. But after a couple of hours with Excel, I can now say that staying in our home is purely emotional, because financially it makes no sense at all.
Check out this table:
|Housing Alternative||Savings||3 Yr Value||5 Yr Value||7 Yr Value||10 Yr Value|
|Rent Similar Home||$310||$12,450.54||$22,323.26||$33,674.98||$53,969.29|
|Rent 2-bedroom Apartment||$1,135||$45,585.03||$81,731.95||$123,293.89||$197,597.22|
- ‘Savings’ estimates the difference in cost between our current home and the alternative, and includes estimates of the value of the mortgage tax credit, maintenance on the home, utilities, and HOA fees.
- This table assumes a meager 7% return on the saved amount. If the money earned 10% per year, the 2-bedroom apartment would pay out nearly $235,000 in ten years. Yikes.
- My wife may threaten divorce if I use this table to try to get her to move.
When I showed Jesse this table, he took it to another level: after ten years of renting, we could go right back to our current cost of living, let the $200k sit in the market for another ten years (when I’d be reaching my goal retirement age of 54), and have around $400,000 extra in savings. Four hundred grand (or $470,000 with a 10% interest rate on the savings).
Summing up: If I lived the next 10 years in a 2-bedroom apartment – investing the savings along the way, the end result could be an additional $16,000+ per year in retirement.
I don’t know what else to say about it. We love our home and our neighbors. We’ve planned to be where we are for a long time – maybe forever.
But these numbers aren’t unreasonable. It’s one thing to grasp the total cost of home ownership in the traditional sense (principal plus interest), but adding in the cost of lost savings is making the house feel really, really expensive.