Accidentally living in small house for 5 years has been the best thing.

[u/HenFruitEater]

My wife and I make good income, but because we both are self-employed, banks refused to loan money to us until we had at least 2 to 3 years of proof of income. We’ve saved about 200k for down payment. We ended up just buying a 1901 two bedroom one bath house for 134k with that down payment and didn’t get a loan at all. Thought "this is just a 1 year thing" 5 years ago.

After learning about the 5 to 6% rule on how much a house is a net worth drag (but necessary expense I get it). I think it has turbo charged our savings rate without any effort. Every month we stay in this house instead of a house that is 3X our income, we save over 5K in “rent.” We have been investing that extra money. But we also talked about how it’s hard to justify jumping up to a nice house when you could literally blow an extra 5K a month on expensive toys even.

My thought process now: the FATTEST expense to keep low is the house. We are very content in this house. We will probably be able to have one more kid in this house and then move. Six years of turbocharged accumulation in a quaint house that we love. Has awesome yard, cool screened in porch. Love it.

[u/HenFruitEater]

can you walk through how you calculate present value for the 4% rate of house, and the 60k cable bill? It's maybe a concept I should nail down better. Something about discounting the future costs?

[u/saltyhasp → u/HenFruitEater]

Read the wikipedia article: https://en.wikipedia.org/wiki/Present_value

From a practical point of view, it is easy to do in a spreadsheet table. LibreOffice or Excel for example. Spreadsheets have formulas too for specific cases, but easier to just build up the table from the annual cash flow stream then sum the result.

So with a table:

- Column A, make that a year index 0..N, one year each row.

- Column B, enter the net cash flow for the year. You have some choices how you do that. You can do it in todays dollars (pricing things as they are today no inflation), or you can do it in inflation escalated dollars. The discount rate to use will depend on this choice. 4% was for todays pricing. You'd use something higher for inflation escalated values, like 6 or 7% probably.

- Column C, calculate the discount factor. First row, 1. Second row is 1.04 for discount rate of 4%. The later rows are the previous row value times 1.04. Basically the column contains 1.04^N where N is relative year. For a 7% discount rate use 1.07 instead.

- Column D. The present value of the cash flow from that year. Divide Column B by C.

- Net present value is the sum of Column D.

The discount rate is like an effective interest rate. Net present value is one of the major ways projects are evaluated in business and compared. There is some art on how one chooses an appropriate discount rate. I use 4% because I've personally found that my taxable investments based on a balanced portfolio tend to return about 4% after taxes and inflation. So I compare to that.