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- Your neighborhood plays a huge role in how much you save and spend, according to two researchers who studied millionaires.
- If you live in a pricey home in an affluent neighborhood, you're more likely to mirror your neighbor's consumption habits.
- This can affect your ability to accumulate wealth over time, as can the home's price — most millionaires live in a home they can easily afford, which allows them to save more money.
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A multitude of factors go into building wealth, but perhaps none play as big a role as where you choose to live.
That's according to Sarah Stanley Fallaw, the director of research for the Affluent Market Institute. She coauthored "The Next Millionaire Next Door: Enduring Strategies for Building Wealth," in which she surveyed more than 600 millionaires in America.
"The key to wealth building is to live in a home that one can easily afford," she wrote, building upon research from her father, Thomas J. Stanley. In his book "Stop Acting Rich," he said one's home or neighborhood is their greatest detriment to building wealth.
"If you live in a pricey home and neighborhood, you will act and buy like your neighbors," he wrote, adding: "The more affluent the neighborhood, the more its residents spend on almost every conceivable product and service."
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So if your high-income-producing, high-consuming neighbors roll up to the driveway in a BMW or a Mercedes-Benz, it's likely you'll feel the urge to do the same. This pressure to keep up with the Joneses can also be affected by lifestyle creep, the tendency to spend more whenever one earns more.
But it's not just neighborly influences that can affect one's overall wealth — the home's price relative to your income also affects your ability to accumulate wealth over time, Stanley Fallaw said.
If you want to make progress on building wealth, keep your housing costs low
Most of the millionaires she studied had never purchased a home that cost more than triple the amount of their annual income. The median home value for millionaires in her latest study was $850,000 (3.4 times their current income), with a median original purchase price of $465,000.
Just consider billionaire investor Warren Buffett — he lives in a modest house worth 0.001% of his total wealth.
So what constitutes an affordable home?
That depends on your salary, your age, and what state you live in, but the standard measure of housing affordability is 30% of your pretax income.
However, if you really want to make progress on building wealth, Business Insider's Lauren Lyons Cole, a certified financial planner, suggests looking for a place that costs 25% or less of your after-tax income and funneling the cash you save toward your retirement accounts.
"Keeping housing costs low is smart, no matter how much money you have," she wrote. "The best financial move you can make is to literally move to a less expensive home."
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Finding a house without breaking your budget is also dependent upon when you buy — according to Holden Lewis, a mortgage analyst at NerdWallet, timing your home purchase correctly, like during the winter or before you get married, can save you money.
But when buying a home, you should not only consider the cost of living, but how you measure your well-being within the city, community, and neighborhood, Stanley Fallaw said.
"We still argue that your more immediate community (your school district, neighborhood, and town) is more important when it comes to your personal happiness," she wrote. "When you're thinking of buying that 4,500-square-foot McMansion out in the suburbs to avoid a two-bedroom fixer-upper in the city, you're trading size of home for commute. What's more important to you?"
Economics Correspondent, Millennial Wealth
Hillary focuses on the intersection of youth culture and wealth, reporting on the lifestyles and economics of millennials and Gen Z. She covers trends in how these generations are living and spending and examines how the economy is shaping them and their financial behaviors. She also reports on consumer spending and New York City's economy, and previously wrote about the ultrarich and personal finance at Insider before joining its economy team. Basically, she's written about money from every angle you can imagine. Inside the epicenter of America's Great Resignation: Kentuckians lay out the 4 forces driving the state's labor shortage — and explain why it's here to stay Millennial New Yorkers are ditching basem*nts and roommates for luxury apartments at $1,000-plus discounts The world's youngest self-made billionaire hopes to power every future self-driving car with a technology that Elon Musk says is 'doomed' Tiffany and the Trumps: Insiders describe how the president's younger daughter has charted what they say is a distant relationship with her father and come to terms with having America's most divisive last name Inside the French Riviera's pandemic party problem Yachting insiders detail the rampant sexual harassment aboard million-dollar ships, where crew members are promised a glamorous lifestyle and can instead find themselves trapped at sea with no one to turn to Millennials came limping out of the Great Recession with massive student debt and crippled finances. Here's what the generation is up against if the coronavirus triggers another recession.
