You might read last week’s post and think that buying a home is one of the worst decisions you can make. Quite the contrary! Let’s face it. Not all of us want to learn about investments. More so, many people are not patient investors and feel uncomfortable investing in stocks and bonds because quite frankly it’s scary and we don’t understand it. That’s perfectly fine. We’re all built differently and we all take different risks.
How many people do you know that are extremely risk adverse with their money? Probably many. The majority of Canadians have most of their savings in high interest accounts because they’re afraid of doing anything with it other than losing it. What most individuals don’t realize is that putting their money away in a high interest savings account is the equivalent of losing money.
We might be in a lull right now, but inflation is real. Over the long run inflation has usually run a bit north of 2% year over year. This means each year the money we earn is worth less and less. With GICs and savings accounts giving a paltry interest rates of less than 1%, keeping money at the bank is actually losing you money.
That’s why savers are being punished. In the past, savers would at least get enough interest out of their savings to cover inflation and keep their buying power for the future, but now we are faced with a slow growing global economy that is stuck on low interest rates. Keeping your money in an interest bearing savings account is no longer an effective way to keep the value of your money.
As history has shown, housing has usually kept up with the rate of inflation over a long period of time. Buying an affordable home would not be the worst way to ensure that your money actually keeps up with inflation. Even with the crash of real estate in America, real estate has slowly crept back up. Owning a piece of land still has its merits over time and acts as a really good savings tool.
I’ve always said that people will always try to pay for their shelter first before anything else. We all need a roof to live under. That’s why having a house and a mortgage will force you to save your money for the future. It’s probably a better alternative than paying rent and doing nothing with your money.
When it comes to buying things, it’s just normal human nature that we have unlimited wants. After buying something, we’re out looking for the next thing to buy. For the compulsive shopper, savings is the last thing on their mind. The standard rule of thumb is to save 10% of your gross income. That’s income before tax not after. For many people, that’s a hard to do. Looking around, it would be hard to find someone who makes $50K a year and can manage to save $5000 over the entire year. Why else are our TFSA accounts empty?
With such rampant consumption in our society and lack of focus on savings, it comes as no surprise that people complain that they’re broke after paying rent and all their bills. That’s why individuals that can’t control their own spending are better off buying a house. This forces the individual to forego their consumption habits and save through the monthly payments of their home. As a glorified savings account, a house is probably the most effective way to force a shopaholic to save.
People who love to shop probably won’t stop. Given unlimited resources, they could shop forever. Take the example of the student that was ‘mistakenly’ given $4.6M dollars. It didn’t take her long to blow it all away. That’s why it’s probably more important to just buy a home to retain some kind of equity down the road. Buying a home as an investment is all psychological. We will pay for our shelter before we spend it on something else. It’s just common sense that we don’t want to live on the street.
Don’t Over Do It
Even when looking for a house it doesn’t mean that the individual should buy the biggest and most expensive house they can afford. That’s not the point. In this instance a house is used as a savings vehicle, but the debt should also be manageable. This means that one should always try to keep housing costs to a maximum of 30% of take home pay (after taxes). If that means that the only affordable housing is a small starter home, then so be it. We aren’t all privileged to be buying 2000 square feet mansions. At least at the end of the day it’s still better than blowing away all the money on depreciating assets.
There are many who have turned their backs on stocks because they feel it’s a rigged game. They just don’t have the patience to see it through. There are those that have too much anxiety that they can actually lose money in the markets over the short term. There are those that are ultra conservative and don’t want to do anything in the form of investing. We are all different. That’s why it’s important to find your perfect niche for building wealth. Sitting on the sidelines isn’t a particularly good strategy considering how long we all live now. It’s very hard to ensure that our money doesn’t run out during our retirement years.
Whether a house makes the most sense as an investment is up to your own expectations. In general, a house will move in sync with inflation so at least the value will still be there. Just be conscious that it may take more than just a primary residence to retire. Cash flow has to come from somewhere. Maybe real estate just makes more sense as a glorified savings account, but that’s up to you to decide.