Make your home your asset - Is your home an asset or a liability? Have you consider renting instead of owning a house? Renting allows you the flexibility to pursue investments without having a commitment to a long home mortgage.
In most cases people buy a house and then furnish it in such a way that they cannot afford to allocate any money towards investment. With children coming along it becomes even more difficult to save. The only way to stay on top of the rat race is to work harder in their current job or to take up a second one to suppliment the income.
A good way to prioritize your finance is to invest and reinvest your earning rather than own a house first. Once you have mulitiple streams of income from your investment, you may want to consider paying cash to buy your dream home then.
Take a look at these two scenarios. Option 1 is to rent an apartment for $280 per week. Option 2 is to buy a $180,000 apartment, which would take a deposit of $36,000 and then repayments of $245.38 per week for the next thirty years (interest at 8% fixed).
In order for renting to be a better option I need to recover $34.62 per week (the difference between the rent and house repayments).
Remember I need a deposit of $36,000 on the purchase. If I hadn’t used that money as a deposit I could have invested it. If I had of chosen an average investment and achieved a return of 15% per annum, then my return would be $5,400 per year.
The cost of rent above house repayments is $34.62 per week or $1,800.24 per annum. This still leaves me $3,599.76 better off ($5,400 less $1,800.24) each year.
Over thirty years, investing that $3,599.76 at 15% interest (compounding annually) would leave me with an investment of $7,969,515.97. If I was an exceptional investor and achieved a 20% return, my new investment after thirty years would be $29,927,699.19.
Compare that with the value of the apartment after 30 years. Being generous let’s say that the apartment’s value is tenfold what I bought it for. It is now worth $1,800,000. This is still $6,169,515.97 less than my 15% investment option.
So what is the interest I would have paid on the apartment loan over thirty years? $202,792.80? Thirty-seven and a half years rent!
The money you use for renting may not generate you income. But this amount is insignificant compared with the amount of interest that you pay on a thirty year home loan.
Yes, owning a home may be your dream right now. However, learning to put your money into investment and make it work for you before you buy the house alway makes more dollars and sense. This way, you transform your liabilities into asset.
Cheers,
Popularity: 76% [?]
My Squidoo Page
