When I started learning about personal finance and started to share my knowledge on this blog, I thought it was a good idea to teach people how to save and invest. But boy was I wrong.
What I realized after learning about saving and investing is that the save and invest model only worked for people that had free cash flow. All the other similar teachings from sites like Mr Money Moustache and Millennial Revolution focused on saving a lot and investing. These blog sites focused on people that actually had money left over after their monthly expenditures, but in real life this is not the case for the majority of people.
After talking to more people about personal finance and recognizing their troubles of just getting by in life, it became quite apparent that the FIRE movement and the save and invest methodology applied to only a small percentage of the population. In fact, only those with successful careers and high paying jobs could achieve this.
If you talk to many people about their finances and their money habits, it becomes prevalent that 99% will respond with “what savings?” That’s because at the end of every month most people are just barely scraping to get by. Many would be lucky if they could have a $100 at the end of the month.
That’s because most of us have no desire to save or we just don’t have high enough paying jobs that are enough to pay greedy landlords or the exorbitant costs it takes to live in a city that actually has jobs. It’s no wonder that Canadians save less than 2%. Let’s face it we have nothing left over.
So when someone says, “hey you should invest in stocks” the reality is most of us reflect and think “what is 7% gain on a balanced portfolio with a value of $0?” Exactly $0! If none of us have money left over at the end of the month to invest, then how the heck can one get ahead? Buying stocks and bonds are meaningless if you have no money to buy with.
The whole premise of becoming financial independent is making your money work for you. This is only achievable if someone can continually save a large amount of their income and invest it. But there just aren’t that many high paying jobs in the marketplace for this to happen for everyone.
The power of compound interest only works if you keep investing more money consistently. That means having good savings habits and having good cash flow. It’s impossible to do any of these things when your salary barely covers rent.
Savings $20 a month and investing will never get anyone to financial independence. You need to save somewhere closer to $2,000 a month to really see the effects of compound interest. For most people this is impossible.
The only individuals where this is possible are those that work in technology, practice medicine like doctors and other jobs that pay exuberant salaries like investment bankers or CEOs. But how many of those are around? Certainly those people don’t represent the 99%.
Buying A Home Is Better For Low Income
One might think that renting is better with low income, but this is entirely wrong. If you’re living in a city with expensive real estate and rent is bleeding you away year after year, then it’s a long term losing cause.
If you find yourself with precarious income and a lack of a steady job that gives consistent income then investing is futile. It will be impossible to have your money work for you when you have to take that money out before you retire. Compound interest will never work for you.
If you’re in low income, finding a way to buy a home, any home is the best way to get yourself in a better financial state. That’s because throwing away rent every year with no savings will just lead to financial disaster. With no savings retirement will be a whole pile of NOTHING!
But how does one afford a house with low income? It probably means sacrificing even more than you are right now to save up for a down payment. This might mean renting a room only rather than an apartment, you might need to sacrifice some independence to make it happen, but the fact is it’s a smart ideal to do anything you can to save up the five or ten percent necessary to buy something, anything.
Use the mortgage as a means to force yourself to save for your future. Why pay someone else’s mortgage when you could be paying your own and saving the money for the future?
Leverage, Leverage, Leverage
Perhaps the number one reason why buying a home when you don’t have a lot of money is leverage. There is no investment on Earth that exists where someone can leverage their money so much as buying a house.
Banks are risk adverse, but they see homes as almost a risk free investment. This allows home buyers to make as little as 5% down payment and turn it into a house. Think what this means. What investment type exists where a bank will allow you to borrow 20 times the money you have? Only one. A house.
This makes buying a home much more lucrative. With just $20,000 someone can turn that into a $400,000 asset. There is no way that someone can achieve that with stocks. Leverage is what makes a little bit of money seem like a whole lot more.
This can lead to much bigger gains when housing prices go up. A simple 5% gain on a house that is bought with 5% down payment is a full 100% gain. This happens quite frequently in hot housing markets like Montreal or Toronto.
The Safest Gamble
Some might say, look does it make sense to buy a house when our household income is $70,000 but the house is $500,000? The mortgage might seem ridiculous, but would you rather pay $2,500 in rent or $2,000 on a mortgage?
At least the $2,000 is going toward future savings and besides you need somewhere to live. Paying $2,500 and saving a mere $100 a month will get you nowhere investing.
Even if prices in homes were to fall, it’s still not the end of the world. You still need somewhere to live and prices for rent will never decrease. So does it matter if your house falls $100,000? You’re still paying less with the mortgage than rent. At least you are still paying yourself with a mortgage. In the end you will still end up ahead of investing $100 a month over the 25 years.
Even if you were to default on the mortgage, it’s still not that bad. Remember you would be saving nothing with renting. So even if the house is lost, you are in the same spot as when you started. You ended with nothing, but you also started with nothing. It’s a no lose situation.
All in all it makes much more sense to buy a house if you are not in the 1% of earners. So get out there and buy buy buy!