December 1, 2017
December 1, 2017
While there’s much discussion about building wealth through retirement plans or investing in stocks, a home is probably still your biggest and best investment. That certainly true for the average household in America. Yes, there is the potential to accumulate significant wealth in retirement plans and stocks. But the reality is that a home is the biggest and best investment for most people.
Here are the reasons why.
One of the reasons why owning a home has become the preferred way to build wealth is that it happens silently.
Mortgage amortization is an excellent example.
When you purchase a home, you expect to make your monthly payments – for what seems like forever. You’re doing that for the purpose of providing shelter for you and your family. But while that’s happening, you’re quietly building wealth through the gradual pay down of your mortgage.
Let’s look at this way. You purchase a home for $250,000, and you make the mortgage payments for the next 30 years. Even if the property does not rise in value, at the end of 30 years you will own an asset that’s worth $250,000.
Not only does the home provide you with shelter for 30 years, but it silently builds wealth that will benefit you for the rest of your life.
And that’s only half the story.
Home appreciation is the more commonly recognized way to build wealth through homeownership. Even a modest rate of appreciation can provide big returns over the long run.
For example, if you purchase a home today at $250,000, and it experiences an average rate of appreciation of 5% per year over the next 30 years, the value will grow to approximately $1,080,000.
That may sound like an incredible number, but it’s also obvious that 30 years ago the $250,000 home that you purchase today was a lot less expensive.
The appreciation situation is even more powerful when you mix it with the mortgage amortization factor. It means that after 30 years, when your mortgage is fully paid, you will own an asset that’s worth over $1 million. At that time, you can either choose to continue to live in it mortgage-free or to sell it for retirement or some other purpose.
This is an often under-appreciated aspect of homeownership. But since owning a home requires efficiently managing a major asset, you’re forced to develop greater discipline than a renter will.
For example, since you typically will have more expenses as a homeowner than as a renter, you have to budget for more expenses. You also have to budget for repairs, which a tenant never has to worry about.
True, the extra expenses force you to adopt greater budgetary discipline. But that also forces you to develop a regular savings habit. That habit will be a benefit beyond homeownership itself.
This will be especially evident as the years pass, and the cost of homeownership will decline compared to renting. For example, while a tenant’s rent may go up each and every year, a homeowner’s mortgage will remain constant for the life of the loan – at least if it is a fixed rate mortgage.
But once the mortgage is paid off, the real benefit of that fiscal discipline will become more apparent. Absent the mortgage payment, you will have more money to save each month – plus the discipline to do it.
According to the financial media, retirement plans are the biggest single asset that most people have – or should have. But reality tells a different story.
A study by the Government Accountability Office (GAO) found that 52% of all Americans have no retirement savings. Many among those who do have retirement savings have no more than a few thousand dollars.
Everyone should have a large and growing retirement plan. Even if you purchase a home, you should still plan on creating a generous retirement plan. But not everyone does, and not even the majority.
Homeownership continues to be the single biggest source of wealth among middle-class households. The combination of a retirement plan and a home can represent the very best retirement plan possible. It means that you will have a substantial amount of wealth coming from two different sources.
Unfortunately, Americans as a group have very little money in savings. While having at least a well-stocked emergency fund is always recommended, the average American doesn’t even have that.
A 2016 study by Go Banking Rates revealed that 69% of Americans have less than $1000 in savings. Of that group, 34% have no savings at all. This means that only 31% of Americans have at least $1,000 in savings. We can even presume that a large percentage of that group has no more than a few thousand dollars saved.
This is obviously a dismal situation. But it highlights the fact that a home is probably still your biggest investment. It will be for most people. That’s why homeownership has become a necessity, now more than ever.
If it’s difficult to accumulate money through traditional savings or even in retirement plans, then owning a home becomes the perfect forced savings plan. It will provide shelter for you and your family, while it silently builds wealth, year after year.
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