Making It To The Finish Line

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There are so many things to learn when buying a house.  Getting enamoured by glistening marble counter tops and golden sparkling hardwood floors isn’t the only prerequisite to purchasing a home.  You wouldn’t go out and marry the first chiselled, six foot tall, rich handsome guy you saw on the street would you?  Would you …?  I’ve already written about buying too expensive a home, being more aware about mortgages and what to expect for interest rates, and how to make your monthly mortgage payments fit into your budget.  So what happens when the dream home you purchase ends up being paid off.  Will it really be the best purchase you ever made?

Imagine retiring with a paid off home, what would life be like?  Would the house alone be able to sustain your retirement years?  A very noteworthy observation that you would make is that a home will continue to siphon away the savings you will have accumulated.  Property taxes, maintenance of the home and utilities still need to be paid in order to sustain a functioning home.  The fact is, your primary residence, if that is the only thing you decide to save with, still is not enough to sustain a proper retirement, but it’s a start.

A house needs to be complemented with proper savings in order to sustain a retirement where you will no longer have to work.  You cannot eat your home, a home won’t buy you any clothes, nor can it pay for you vacations.  A paid off home is just shelter.  It’s something that will keep you warm in the winter and dry in the rain.  If your home is your only investment, then you might need to rethink that strategy.  As I have written before, don’t overindulge a home just because you can afford to pay it.  Think carefully about what you will be left with when you reach that finish line.  A house is a great thing to own, but it won’t help you find financial independence.

If you are a follower of Garth Turner’s The Greater Fool blog, he has mentioned the 90% rule for all home owners.  What does he mean by that?  Well if you take your age and subtract that from 90, that is the percentage of your net worth that should be held in your primary residence.  For example, if you are 35 years old, then the percentage of your net worth that is sunk into your primary residence should be no more than (90-35) 55%.  This means if you’re looking at a $1M dollar home, you would have paid off $550k of it by the time you are 35 in order to follow the rule.

The 90% rule was a metric developed so that in the ideal situation, when you retire, your primary residence would only be a small portion of your net worth.  That would mean that you would have plenty of money invested and saved for retirement.  Is this rule a given?  Is it the best approach?  From a common sense stand point it makes a lot of sense, but in reality it may never be reached by the average person.

At the end of the day, you need to be satisfied with what you want to have when you retire.  Common sense would mean that you can’t just have a house and nothing else. Remember that a house alone will not provide you sustenance.  A decisive plan should be made, a target should be set.  Think about what your retirement lifestyle would cost?  Is it realistic?  Can it be achieved?  If these are questions that you find hard to answer, then approaching a financial planner that can give you a better plan is not a bad idea.  You don’t have to execute the strategy that he or she gives you, but a financial planner will at least ask the proper questions and lead you in the right direction.  Seek to learn, not to follow.

Don’t waste your life trying to pay off a home that stretches you to the limit.  Make proper common sense decisions when it comes to home buying and consider what your future will hold when the house is completely paid off.  Do you really want your financial accomplishments to only be represented by four walls, a roof and fancy stainless steel appliances?

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