MONEY MATTERS MONDAY 22nd OCTOBER 2018
Our Home is Not an Investment
Buying a home and paying off any mortgage is a key objective in building financial independence. It is the foundation step of any personal plan. It is obviously also a major challenge due to the high prices of homes.
Owning our home secures the roof over our head and provides us comfort. It allows us to make alterations and redecorate to make our life more enjoyable. It is especially important for families with children who need a secure environment.
A home is a lifestyle asset
However, our home is not an investment. People may count their home as an investment but it isn’t. It is a lifestyle asset. Just because they are paying their home off and its value is rising doesn’t mean they are building their investments.
We will always need a home, and that home will cost money, a great deal of it. Our home will not generate any income for us. It will not help fund our retirement. It will provide capital growth but so will every other home. If we want to sell our home and buy another we pay the new higher price.
People often plan to downsize when they are older, selling their large home in the suburbs and freeing up money to invest. They plan to buy a small home in a convenient, central location. They are surprised to find the new home costs as much as the old one and there is no money to invest.
Even when people go into aged care a large accommodation bond will be required, which often comes from the sale of their home. Only when they die will the money that went into their home become available as money to invest, by someone else.
Building investments means thinking beyond the home
If we want to build investments we must think of acquiring assets beyond our home. We need to think superannuation, shares, managed funds, businesses, farms, commercial buildings and of course residential properties.
Homes can be a great investment, just not ours. Buying residential investment properties will usually provide a sound rental income and capital gains. Houses are a convenient investment with finance readily available. We can use the net rental income to help pay them off.
Superannuation is important
Our compulsory superannuation is a very important part of our investments. We should take a strong interest in it, get advice about it, and make sure we are earning high returns and managing risk.
Managed funds can be used to build non-super savings with regular contributions. They can earn strong returns with tax advantages, and without the restrictions of super. Shares earn double-digit annual returns over the long term.
It is very important to buy a home and pay it off, but we need to think quite separately about building our investments and financial independence.
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