Why Investing Early is Better Than Buying a Home Early

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LukeLewis

LukeLewis

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If you ask anyone over the age of 40 what they wish they did earlier in life, I bet most of them would say they wish they began investing heavily back in their 20s. I sure wish I did. Reviewing stock market returns over the past 25 years, I kick myself when I think about what I missed out on. What's worse is that, not only didn't I invest, I spent like a fiend! What did I spend on? A house. I bought a house that I didn't really need and I sunk every last dollar I had in paying for it, paying for insurance, taxes, and improvements. I honestly thought what I was doing was investing in one one of my assets. I said to myself, "The more money I put into this house, the more it'll be worth. Then, the more I'll be able to sell it for when I move." Well let's see what happened. I purchase the house for $205,000 in 2005. This was the height of the real estate market. My interest rate was around 5% and the taxes I paid on it were $4,500 per year. The insurance was around $1,000 per year. I remodeled the entire house, including a brand new front porch, back screened in deck, kitchen, bathroom, floors throughout, and brand new paint everywhere. The improvements were in the area of $60,000. Three years later, I sold the house for $225,000. You do the math. Sometimes houses can be big fat losers.

I oftentimes wish I had just remained in the house I was renting before I bought the house I fixed up. I was only paying $950 per month in the rental. It was small, but if I had remained there, I could have begun investing and earning returns a lot earlier than when I eventually began investing in my 40s.

So, the question is, what are the risks with purchasing a home that's too expensive? I don't think anyone would argue with you over buying a really inexpensive house. It's the houses we want that can get us in trouble, not the houses we need. Think about this:

1. You lose investment growth time. Every dollar you spend paying for a new kitchen in your new home, you don't use to grow with investments. You don't get that time back. Once a year of investment growth is gone, it's gone forever.

2. Your capital disappears. Directly above, I meant to refer to time, but I sort of conflated my point with the point I'd like to make here. Basically, when you buy a new home, you'll find yourself in Home Depot and Lowe's more often than you think. And you'll probably want to buy some new furniture. And after that, you'll surely want to remodel your bathroom. If you're like most American's, the only thing holding you back from making improvements will be cash. Once you get that cash though, you'll spend it on the house and not investments. You'll truly be making your home the liability it really is instead of paying into assets that will pay you back.

3. You'll lose valuable investment experience. Whether you want to believe it or not, if you have no money to invest, you won't invest. And trust me when I say that when you don't invest, you don't look into the finer details of investing. Basically, what happens is that when you finally get around to investing some spare cash you've got, you'll be in your 40s. You'll be hunting around the internet for education. You'll also make many mistakes; mistakes you should have made in your 20s. If you had gotten over the learning curve back in the early days, you'd be sitting pretty in your not so early days.

I am definitely not saying that you shouldn't buy a house. I'm merely attempting to educate you on how much of a money pit a house can be. I'm also trying to impress upon you the difference between liabilities (houses) and assets (investments). If you want to buy a house, go small and cheap, not big and expensive. I don't think anyone has ever claimed that they've felt good falling asleep the night before the local sheriff knocked on their door to escort them from the property due to foreclosure. If you want a nice big house, invest first so those investments can pay for it. It's that simple. A bit of patience can be a very prudent ally.

This post is part of a series: Rich Dad Poor Dad by Robert T. Kiyosaki
 
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Why Investing Early is Better Than Buying a Home Early was posted on 06-05-2021 by LukeLewis in the Finance Forum forum.

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