About those people who buy big houses and then cannot afford furniture…
We often hear about families that buy houses but then cannot afford to buy furniture. We assume they are trying to give the appearance that they can afford the neighborhood when they really cannot and perhaps they have stretched their finances so much that they sacrifice a normal lifestyle for appearances’ sake.
From a financial planning perspective, buying more house than you need now, but will need or want in your future and delaying the furniture, can be a financially practical and prudent move if done under the right circumstances.
Each of these families is skipping a starter house and going straight to their dream home that they intend to live in for 10 or more years. The alternative is to start with a smaller home and trade up as income and savings grow. However, buying and selling a home is expensive, and transaction costs can range around 3 percent in addition to 5 percent commission paid to the selling broker. Moving is expensive and even more so when you factor in the cost of the time to move. Staying in one place allows you to reap the benefits of the appreciation in value, because it is more cost-efficient.
In addition, when you weigh your investment in a home versus an investment in furniture, the home wins out. Your home has a better chance of appreciating in value, and your furniture becomes almost worthless after even a limited amount of use. So, it’s better to put money into a house, not the furniture.
In taking the approach of buying a dream home now, you must be sure to factor in the financial risks. If you are taking on a big mortgage relative to your income, the danger is that if you lose your job or run into a financial crisis, it would be hard to sell your home quickly, unless you were willing to sell it below market value. Ideally, you want to be sure you have enough emergency funds to cover the mortgage for 12–18 months if you were to lose your job.