The Happy Minimalist

When you don’t need that much space, you don’t need to buy a big house. You can live in a much smaller house. This translates to lower mortgage payments. Saving on your mortgage payments can drastically cut back on the number of years you need to work to pay off your mortgage. WL, a friend of mine, is looking to purchase a bigger house than I have because he thinks he needs the space. It is easily going to cost him at least $300,000 more than if he were to settle for a smaller space and in a less “prestigious” part of the country. How many more years will he have to work to pay the difference off? Most people try to buy the biggest house they can afford. They stretch themselves. Some overstretch. I took the opposite path. I did not go by what I could afford. As a minimalist, I went with the smallest place I could get. I did not go for a fancy or prestigious neighborhood. As such, my mortgage payments were relatively lower. What I saved on my primary residence, I diverted toward a rental property. So instead of buying one big property to live in, I bought two: one small place for myself to live in and another to rent out. The rent from my tenant was able to cover my mortgage payments on the rental property. As far as my residential property was concerned, I made mortgage payments instead of rental payments. You either pay rent or mortgage. I chose the latter. Contrary to what most financial advisors will advise, I did not maximize my 401(k). I maximized to get the employer match, but not more. Instead I diverted any extra dollars I had every month toward paying off my mortgage. From the earlier section, you will have realized that a minimalist does not have a lot of the recurring costs that most people have (cable, high electric bills, etc). All these savings were plowed toward paying off my mortgage sooner. Over time, I was able to pay off both my mortgages. I am debt free now. It was possible because of my minimalist lifestyle, not because I won a lottery or joined a start-up. Slow and steady wins the race! (Once again, financial advisors will say that paying off your mortgage is not a good idea and that we should maximize our 401(k). Believe me; I know all the cold analysis behind that advice. Only time will tell which was a better move for me.) The way I saw it was: A house is a tangible, physical asset. Regardless of whether the price goes up or down, people need to live somewhere. As such, you derive utility out of it regardless of its prevailing market price. With securities it is different. From March 2000 to Oct 2002, the S&P index value declined more than 49 percent and the NASDAQ fell over 77 percent. If that was the time you were retiring and you still had outstanding mortgage payments and other debts, what were you to do? If you don’t need that money when the market is down, holding on to it does not yield you any utility like a physical asset such as a house does. The exception may be dividend-paying stocks. This is where the financial advisors would talk about the importance of diversification in your portfolio. Well, I consider the real estate that I own to provide that diversification. As long as you are paying mortgage, you don’t own the house. The bank owns it. When you own your house outright, regardless of the state of the economy, you don’t have to worry about the mortgage payments. Because you own your house, you are also shielding yourself from one aspect of inflation—rising costs of rent.