A lot of people, pundits, and real estate professionals say the top way to build generational wealth is to own a home.
Have you ever wondered, “Is this true?”
Let’s take a little look into the in’s and out’s of home ownership in relation to building wealth.
In most cases, the mortgage payment compared to rent for a house (of similar size, etc.) will be several hundred dollars less per month than the rented house.
Check, you save a few hundred a month.
Let’s say it’s $500 per month, for our example here.
If you put that $500 per month into careful investments, you’ll build a great saving account or IRA over time.
If you put that $500 per month into extra payments to the principal, you will pay the mortgage off early and then you can invest the whole amount (former mortgage + $500) monthly. That would build a nice savings account and save thousands in interest payments over time.
Great!
One caution: if you move a lot, then the cost of moving and buying/selling expenses will eat into any nest egg or wealth you hope to build.
With rent, you can give notice and move as needed – as soon as you tidy up so you get your deposit back.
Therefore, if you move frequently, renting is actually cheaper.
OK, so let’s say you don’t move frequently; and, you pay off the mortgage early.
Then you invest all of the former mortgage payment each month.
Are you now wealthy?
And, the answer is . . .
That depends.
It depends on how much you put away and for how long.
If you paid the house off in 15 years and invest that monthly amount for another 25 years, you’d have a tidy sum.
Let’s say you had a $2000 per month mortgage and you paid it off early.
You now invest $2000/month for 25 years at a lowly 5% return compounded daily.
At the end, you would have about $1.2 million.
And a house that is paid for.
That paid for house isn’t wealth in and of itself.
Even if it’s in a desirable neighborhood.
Why?
You live there.
You don’t generate income from it.
You can’t trade it in for cash (unless you sell and start over), you can’t eat it and it won’t pay its’ own maintenance, repairs, insurance or taxes.
What it does do is reduce your housing costs after it’s paid for to a very small amount.
That’s a nice perk as you enter retirement to have fewer expenses staring you in the face, right?
But, it isn’t wealth as it sits there.
HERE is where it builds generational wealth:
You pass that paid off house on to your children or grandchildren, along with the remainder of your savings/investments.
They live there and save/invest a “housing allowance” of $3000 per month at the same 5% interest.
Except they’re younger when they start so they amass more than twice what you did.
And, there is still a home to reside in.
When they outgrow it, or tire of it, they pass it on to the next generation who is also taught to invest their monthly housing allowance, too.
In three generations, there would be “wealth” so long as each generation manages their money & savings wisely, with leaving a legacy when they depart this world.
This is a modest example of a modest house with a modest amount of money saved per month.
What if you doubled it?
There are other ways to build wealth, too.
You don’t have to buy a house to do it.
Let me know if you have questions about building wealth.
©2023 Ronda Cobb, the Money Coach
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