Rent Today, Own Tomorrow

16 Jan 2011

Some 6 months ago my life got flipped, turned upside down. I moved from the only home I had ever known (Ottawa Canada) to Hong Kong. I sold my house, gifted my car and left with a suitcase and a few boxes (largely containing a PC and monitor). There were various reasons for the change as well as various goals. One of the things I was particularly interested in doing was leading a simpler, less consumer-driven life.

I wasn't throwing off the shackles of capitalism. I'm a huge capitalist and I want to make money. I just don't think the average westerner's rate of consumption is healthy or sustainable. I like to save money the way so many seem to love spending it, yet I share the same appetite to earn it. I'm the Germany to your Greece. I dumped a lot of expenses, including large items like car and house payments down to small items like car insurance, home insurance, cable bill, phone bill. Heck I even hang dry my clothes.

I want to talk more about my house payment, because I still have to pay for housing so I don't really save anything. In fact, rent in Hong Kong is stupendously expensive so you might think that I'm incurring extra cost (I pay more and get 1/5 the space). The truth though is that by renting today I'll be able to buy a house decades earlier if I bought now. How's that possible?

It's all about mobility - a powerful asset made that much more powerful by most people's unwillingness to leverage it. The average person makes less money where they are than they could if they moved. This applies to IT as much as anyone else - as you should know with all the talk and focus on a few geographic areas (California and a few emerging markets). We aren't talking small amounts either, my gut feeling is in the 20%+ range.

Let's play out a scenario. Joe makes $100K a year; after 15 years joe has made $1 500 000. pJoe moves and nets 20K more per year, thus earning $1 800 000. In 15 years, pJoe has netted $300K more. After 15 years, pJoe can buy a house in cash. Joe is still paying off his mortgage.

That's an over simplification, but consider a few more points. 20% is ballpark, you could easily make more (or less) especially when you consider bonus' and stocks which probably aren't as popular where you live now than where you could live. Also, while your house might gain value, so too can your extra $20K. Admittedly, this entire approach is based on the fact that you actually save the extra *net* money you make (a house is a good forced savings, but forced savings are for idiots). Also, keep in mind that you are paying interest on your mortgage. On a typical mortgage you'll pay somewhere around 75% of your total's home value in interest. You can't just look at how much more your house is worth without considering how much interest you paid (especially if you don't get tax breaks on mortgage interest).

I should also point out that you should be skeptical of worldwide cost of living ranks. In most lists I've seen, Hong Kong regularly ranks in the Top 5, whereas Ottawa doesn't make the top 100. But in my experience, Hong Kong is much cheaper because of two important factors, taxes and transportation (everyone uses cheap public transportation here). What I've realized is that these lists typically apply to low income earners. For example, the most popular lists I've seen don't take into account taxes. That makes sense for low income earners, because they probably won't pay much taxes regardless of where they live. But our friend pJoe is paying 20% less income tax, no capital gains tax, and no sales tax.

Ultimately, the point isn't how much tax you will or won't have to pay, or what services you'll be able to go without. The point is that, everything taken into account, mobility can have a significant impact in how much you take home. Probably more than you realize because you never seriously considered moving. Whether you save up to own a house outright in 10 years, or decide to spend it on more gadgets is really up to you.

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