How Much House Is Too Much?

Do you ever wonder about your future?

In my interviews with dozens of high-tech executives for my forthcoming book, I heard the same story again and again about how financial decisions made without considering the “fat tails” tend to have considerable negative impact. It goes something like this: After a big IPO or liquidity event, a successful person—worth a lot on paper—buys a big house. They pour their earnings into a multimillion-dollar home without considering the mortgage payments or tax implications, expecting to still be able to retire early and pay for their children’s college education. Why should they worry when their company is shooting to the moon and they are worth millions (on paper)? Soon, the company’s stock starts to slip and they have not yet diversified. When the company goes under or the stock languishes long enough, they’re left with the house, the mortgage payments, the tax bill, and no income stream or equity to support their lifestyle.

Here’s an anecdote I heard during a recent interview, in which an extravagant, post-IPO purchase ended up saving a dot-com entrepreneur from total financial loss. The entrepreneur had $100 million in paper wealth at one point. Not wanting to sell any stock, he borrowed millions to buy a giant house. He also bought a $10 million yacht. But you can’t finance a yacht, so he had to sell some of his shares to pay for it. It turns out that this was the best thing that could have happened to him. He had a great time and threw huge parties, and then, his world fell apart, the company went out of business, and his stock wealth went away. He lost the house and his Flexjet card. He realized the only actual asset he had was the boat; he sold the boat, and that $7 million is what allowed him to survive and go on to his next venture. He said, “I love boats.” In that case, the boat saved his financial life. Lucky break.

It seems everyone in the Bay area knows someone who has lost his shirt buying a house, because it is such an easy trap to fall into. The tendency in Silicon Valley is toward optimism. When your company is doing well, you are on top of your career, and your stock keeps rising, it is easy to defer saving for your future. But, the unexpected can happen, and quickly. It turns out that for those who have not achieved financial independence, saving now—during your peak earning years—puts you in a much stronger position going into retirement. A home purchase too rich for your situation can disrupt your dreams and jeopardize, if not shatter, your ability to retire on time.

The last thing you want to do is have to work when you’re physically ready to stop. I recently met a woman who was forced to go back to work at age 66. She is recently divorced after a 30-year marriage and was hoping to spend her retirement reading and relaxing. Instead, she just took a full-time job because her Bay Area rent eats up too much of her small Social Security check.

Enthusiasm is rampant in the Bay Area and powers the quest to build and grow cool technology companies. But a bit of wisdom and forethought about very real downside risk should be included in all financial plans.

What steps are you taking today to ensure your financial future will lead you to your dream reality?