Rent. People say it like it’s a dirty word but it doesn’t have to be that way—especially in today’s economy.
There’s no doubt about it, purchasing a home gives you equity. Equity is good.
In theory, it’s great to save up a 20% down payment and buy a lovely home that your monthly cash flow can sustain. Over time, you easily pay off your mortgage as the value of your property goes up with lots of income left each month to save for your liquid retirement assets. In retirement, you’ll live mortgage-free while sitting on large investment portfolios to fund your daily needs.
Sounds brilliant, right? Well, in a perfect world it is!
But the world isn’t perfect. The cost of living is rising, wages are stagnating, and housing prices in the GTA are climbing steadily.
It’s time to face facts: most of us can’t afford to buy a home, and may never be able to.
I see many first time home buyers with only 5% for a down payment, a $300,000 mortgage, and a monthly income that cannot sustain the costs. Young couples get stuck with 80%+ of their after-tax paycheck tied up in housing costs because they bought a house they simply can’t afford.
Just because the anticipated mortgage payment is the same amount you pay in rent does not mean you can afford the house. There are mortgage payments, condo fees, property taxes, insurance, phone bills and utilities, not to mention other costs of living like transportation, weekly groceries, and any other monthly debt payments.
It adds up. Houses eat money.
The consequence? House poor young people with no money left over for any fun, regular life expenses, and long-term or emergency savings. All the money is spent before it even hits their checking accounts.
As a home owner, if something breaks – it’s on you to fix it. When the roof leaks, or the basement floods, it’s 100% your cost. No landlords. With no emergency savings fund, home repair and maintenance expenses go straight onto credit cards and home equity lines of credit and debt starts to rise. Daily living expenses such as food and entertainment go directly on credit as well—and are never paid off. Month after month. Year after year.
You might think that even though you can’t afford the house now, your income will go up over time. This is probably true – but so will the cost of living. So, unless you’re counting on major income adjustments your wages will rise with inflation, just like your utilities, property taxes and fees. If this is the case, your income may rise, but you will always be spending 80% of your income in bills.
When you buy a home that your monthly cash flow cannot sustain, you run the risk of not being able to save for retirement and worse – accumulating tens-of-thousands in consumer debt. After a lifetime of this, you could end up in retirement with a house that still isn’t paid off and no savings portfolio.
New School Advice
Buying is great, but wait until you can actually afford it. Ideally, your new home would leave all of your monthly fixed bills around 50% – 60% of your after tax income, leaving 30% for life and at least 10% – 20% for savings.
Until then, or if you don’t think that day will ever come, rent proudly – but be smart about it. Rent is actually a smart financial choice, but only if you take advantage of the fact that you don’t have to do renovations, repairs, maintenance, or taxes. SAVE THE MONEY
1. If you rent, keep your total monthly fixed costs at 50% of your after-tax income.
2. Ensure you are able to save 20% each month for your retirement.
3. DO NOT spiral into consumer debt.
ADVICE FOR HOUSING
Ideal: Buy a house with monthly fixed costs at 50% – save 20%
Middle: Rent and keep monthly fixed costs at 50% – save 20%
Not good: Buy house with fixed costs higher than 70% – unable to save
Worst: Rent over lifetime with fixed costs > than 50% and unable to save 20%
WATCH MONEY AWESOMENESS HERE