I was on IG this morning when I came across a post from a financial literacy related account. The post showed a picture of the home they qualified for and a picture of the home they actually bought. The home they qualified for was a nice $450,000 huge home (they are in Texas). The home they bought was a nice $200,000 home.
The interesting thing about conspicuous consumption is that it isn’t just limited to Jordan and Gucci. A lot of us engage in wasteful spending across the board in a continuous effort to prove that we are worthy. We want to stunt, across the board. We see it in our vacations, our cars, our beverages and now, our choice of residential property. We want to stunt.
A home is not an investment
I want to encourage you to not just see a home as an investment and something that always goes up in value. That is what most people use as a reason to over buy when it comes to their residential home. Stop that, its time to see it as something you can rapidly pay off toward freedom not just afford to manage the debt payment for thirty years.
The post made a point that banks are in the revenue business and we need to be in the wealth business. Wealth comes with paying off a home not with making all the payments on a home. If you make all the payments on a home you lost because you paid the bank a ton of interest.
The faster you pay off your home the sooner you are free. If you buy a 450k home that you can ONLY afford to make the payments on you will be stuck playing the long game. You will look up and five years later you haven’t even made a dent in the principal.
Live below your means
The smarter thing to do is buy something that you can more than afford and then make it yours. Paint it, put in new floors, kitchen etc. Just like in a flip, if you buy at the top of your budget you are someones exit strategy. They get rich while you suffer in debt. The smarter thing is to buy something that is a fixer upper and capitalize on their unwillingness to improve the property both in negotiating a low price, benefiting from the forced appreciation and by getting to build exactly what you want how you want.
Another thing, many of us buy a home with a big family in mind and then when the kids leave you are left with too much home and too much lingering debt on that home. Make sure that you buy a right sized property, usually a three bedroom, not the huge 5 and 6 bedrooms folks were buying pre crash. Be smart, thing THROUGH the empty nest not TO the empty nest.
I recommend that even if they qualify you for a lot, buy what you can afford. The appreciation game is a game of hope. Paying down the debt is something you can 100% control. Be in control.
The two income trap
This is really important when you have two incomes because you can get caught in the two income trap. This occurs when you buy a home with both incomes under the presumption that both people are going to always be working and making money. That trap can come back to bite you due to sickness, injury, or unemployment. Don’t buy what they say you can afford, but what you know you can afford.
I have seen my parents do just this. Prior to the crash my parents bought a HUGE home. After the crash they decided to downside into a home they could easily afford on one income. As a result, even through difficult times they are still winning.
So the key here is that sometimes the experts are actually just sales people. If you want to get wealthy and free you need to take advice from those that are wealthy and free not from sales people. I encourage you to buy a home but don’t overdo it to impress your friends. Like my mentor always says, the people who you are trying to impress will be the first people laughing when you lose what you built trying to impress them.
If you are interested in investing with our club on either the stock or real estate side we would be happy to welcome you into the partnership. Email firstname.lastname@example.org today to join.
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Thanks for reading!
Be great, invest well,