The Smartest Decision We Ever Made To Build Wealth Rapidly

In order to build wealth rapidly, the smartest decision we made over the past year was to live far below our means. But what exactly does that mean? In the past few months, I’ve explained how we save money on groceries and on dining out, but neither of these come close to today’s topic in terms of the amount of money we are saving.

This post will detail how our choice of living has been, from a numbers perspective, the biggest factor when it comes to doubling our savings rate in 2016 and helping us build wealth rapidly.

Before I dive into the numbers, I’ll reiterate the importance of finding something to aim for. Doubling our savings rate hasn’t been an accidental byproduct, but a carefully crafted and conscious decision made by us at the start of this year.

Lewis Carroll summed this concept up best when he wrote:

Alice: Which way should I go?
Cat: That depends on where you are going.
Alice: I don’t know.
Cat: Then it doesn’t matter which way you go.”

Determining where we wanted to go was the first step. The second step was finding ways to reduce our spend. So the first question is:

How much should we spend on housing?

“Should” is a funny word, because it groups us into the remaining masses of the consumerist world we live in. “Should” represents sticking to the “norm.” As you can tell, “should” is a dangerous word if you want to rapidly increase your net worth over time.

When it comes to the cost of renting, you’ll often hear the term, “Rent-burdened.” What this means is the family living in the rented house/condo/apartment is paying MORE than 30% of their income towards housing. 30% is a lot, so for any family to be paying more indicates rent is a burden on their budget. This also helps explain high-income families facing financial trouble when they decide to purchase a home that is too expensive. The burden can be felt at any income level.

“In Cook County, 52 percent of renter households are rent-burdened…versus 49 percent nationwide.” As usual, Chicago, and the county we live in, Cook, is ABOVE the national average

The cost of OUR housing:

When my girlfriend and I were reviewing our options to find a new place to rent together, we considered a few factors. The first was location. We wanted to be close enough to work so that we could walk. The second factor was the place itself. What types of amenities did it offer? An in-unit washer/dryer? A balcony?

The third and final factor was the price. If we used 30% as the maximum amount in our budget, then we should be spending ~$40,000/yr or about $3,300 per month. For Chicago, that’s not hard to do. Within a few blocks of me, I can find 117 results matching that price range at this specific moment. If I search the same criteria across multiple platforms, I’m sure the number will rise to more than 200 available units. After all, those homes are what we SHOULD be paying.

To take things a step further, I also surveyed close friends of mine. I found, based on their reported numbers, that 6 out of 10 close friends would be considered “rent-burdened.”

Many of my friends are paying such a level of rent because, you guessed it, that’s what everyone else is doing.

So, what % of our income do we pay for housing?

We pay less than 15%.

To add to this, we also signed our current lease for 2 years with the agreement that rent will NOT go up. Barring any unexpected income hiccups next year, I’m expecting our cost of living will dip closer to 12%. We love our place. It is 700 sq ft with an in-unit washer and dryer, brand new appliances, and a balcony. We have all the amenities we need and want (except for a pool, but I find time to swim in Lake Michigan instead). We even have a gym in our building and 24-hour doormen.

If you live in a big city, you know the convenience to not have to be at your door when the postman comes with a delivery that needs to be signed.

To put things into perspective, our decision to live where we do now fully funded my 401k, my IRA, AND my girlfriend’s IRA for 2015.* 

Instead of paying for a second bedroom that I would use 10% of the time as an office or a second bathroom that would be utilized only in the mornings when we find ourselves getting ready at the same time, we’re instead making massive strides towards securing our financial freedom.

Would we enjoy the perks living in a place that we SHOULD be able to afford? Sure. However, we’re happier going against the grain to pursue our financial independence at an early age.

Our ability to crank the dials on the process to build wealth rapidly allows us to feel more secure in our future. Well worth it in our opinions!

*Here are my calculations: If we double our rent and put ourselves at 30%, where the majority of our neighbors are at, then we would have needed an extra $30,000 in income to pay for our rent. $30,000 would need to be taxed at ~30%, so we would only see $21,000 spent on our rent. Instead, that same $30,000 that would have gone towards rent, can fully fund $18,000 in a 401k, and another $11,000 split amongst two Traditional IRAs.

Image via Unsplash

  • Anni

    You guys have done a really great job but I think the underlying issue for many people living in big cities isn’t that they are choosing to live in a place they “should”, it’s that to find a apartment with those things you’ve listed (close to commute, safe, has laundry on complex atleast if not in apt), especially in big cities it’s just not very do-able on a smaller entry level salary. In LA where I live the average HOUSEHOLD income is around $55k so ~$36k ish post tax where if you followed the 30% rule you would be attempting to find a place for less than $900 a month which can be very tricky depending on where you work and how much time you want to spend a day commuting.

  • San

    I love the way you think about this, but if you have a combined 6-figure income, it’s also easy to say that you should spend less on housing… the average household income is well below that and depending on where you live (which state, which city) it can be tricky to nearly impossible to stay under 30%.

  • What I did in terms of housing in my mid-20s was buy a 4-unit using FHA 3.5% down financing. I lived in one unit, and rented out the other three. I basically lived for free and got a bit of cash flow every month. This strategy will supercharge your wealth building. 💰💰💰

  • William Jonathan Cain

    Excellent goals and thought process, you are displaying the “millionaire mind” for sure!
    Question: When you say to spend less than 30% of your income on housing is that pre-tax or post-tax?
    This was a great checkup for me, currently I’m at 13.5% pre-tax and 23% post-tax and own my home.

  • Adam

    Others have pointed this out already, but most of what is here isn’t so much about making smart budgeting decisions to save money, but rather being rich. It’s the age-old proverb, it takes money to make money.

    • William Jonathan Cain

      If someone makes $2,500/month, has a $1,000/month rent, then gets a roomate to split the cost with, you’re spending $500/month on housing. That’s 20% of your budget. There are TONs of places throughout the country where you can find a two bedroom place for less than $1,000/month.

      • San

        …which means, everybody who doesn’t have a huge income needs to live with roommates?

        • William Jonathan Cain

          Yes, unfortunately we can’t all live in huge homes by ourselves. Also this can be temporary until you can get on stable financial ground. This is living within your means and the way to get ahead financially, it’s not required but it’s much harder to get ahead without cutting back and splitting cost.

          • San

            Not trying to argue with you… of course “we can’t all live in huge homes by ourselves”, but you gotta realize that $2500 (post tax, retirement, healthinsurance etc. ) is “stable financial grounds” for people with median household income.

          • Your comments are so woefully out of touch with millennial life in nearly every American city that my eyes are almost stuck in the rolling position.