Let me start out by saying that there are some exceptions to this statement. However, there was simply not enough space to make the title of this blog post, “90% of the people who own their primary residence have an expense dramatically hurting their cash flow, ultimately keeping them from becoming financially independent and enjoying a comfortable retirement.”
In the previous weeks we have talked a lot about Income vs. Expenses, and Assets vs. Liabilities. If you have not read these blogs yet, I highly recommend you take a few minutes and learn how the rich become richer.
The biggest financial mistakes that most people make usually occur when they buy their car or primary residence. Peer pressure and great marketing campaigns have a way of making us believe a bigger, better, newer, sexier, more expensive (you fill in the blank) will increase our quality of life.
Making an uneducated decision on your primary residence could be a financial mistake that affects you for 5, 10, 15 years or more depending on the severity. It could also be one of the happiest moments of your life if you are patient and disciplined enough to make a wise financial decision. The purpose of buying a home is to raise your quality of life. The key is to not buy a home at the max amount you can qualify for, but a home you truly can afford. If you stretch yourself financially, you will actually lower your quality of life even though you are living in a nicer home. Yes it’s possible, here’s how:
In a personal budget, the roof over your head is almost always your greatest EXPENSE. Whether you are renting or own your home, your primary residence is an expense. Owning a home will always remain in the expense column until you either pay it off or sell it. The most common thought that goes through the mind of renters is that “paying rent is throwing away money,” which is not always the case. It’s important to know that owning a primary residence is not an investment. Why? Because investments pay you. The upside to owning your primary residence is having the peace of mind knowing that you can raise a family comfortably and stay in one spot for the long-term.
There are two simple rules you can implement into your life that will allow you to increase your quality of life when purchasing a home as your primary residence.
- Your housing expense should not exceed 28% of your household income.
- Your principal, interest, taxes, insurance (PITI) should not exceed the market rent for the property. If you are financially conservative, your PITI should only be 75% of the market rent.
The first rule is broken down in detail in Are You House Poor? This will ensure you are not living beyond your means and that your quality of life increases by purchasing a home.
The second rule is a great way to take out all of the emotion in buying a home and ensure it is a financially wise decision.
The sole purpose for following these two rules is to ensure that if you ever fall into tough financial times, you will not become desperate and make a rushed decision. You should never put yourself in a position where you are rushed to buy or sell your home. If you are patient and have the self-discipline to follow these two rules, you will truly appreciate your home and be thankful you did not succumb to instant gratification when the day comes to purchase your primary residence.
If you want your million dollar dream home, grow your assets and shrink your liabilities first. Let your money work hard for you rather than working hard for your money. Once you have enough passive income outside of your job to cover your living expenses, you are now ready to make the move. If you do not have positive cash flow from rental income property, then that NEEDS to be your first step. Stay clear of investments that do not have adequate positive cash flow. You are entitled to a reasonable return of at least 10% from your investment dollars, which is more than achievable today if you buy investment properties in the right markets.