June 21, 2019
No matter what “wealth” looks like to you, chances are that you’re making financial decisions in an effort to get you there. For some, the definition of wealth might be a well-funded retirement. For others, it might mean being debt-free and financially independent.
Regardless of your exact financial goals, buying a home is likely an important part of the plan. In fact, for many Americans, homeownership can be one of the biggest factors on the road to building wealth.
Let’s take a look at why this is the case, and some things to watch out for along the way.
What Is Wealth?
At what point would you consider yourself wealthy? Is it a specific dollar amount in the bank, or simply the point at which you recognize you’ve obtained certain freedoms, like retirement or paying off debt?
The road to financial freedom is different for everyone, as are the factors that determine what “wealth.” This makes it difficult to create one specific blueprint for building said wealth; instead, everyone will have a unique path intended to reach their own important financial milestones.
This journey can rely on many individual factors, including your:
Of course, there are many other factors that may impact how you build wealth, what you define as wealth, and how long it takes you to reach that goal. Determining what wealth means to you, though -- and how you’ll know when you get there -- is an important first step.
How Homeownership Can Build Wealth
Buying a home isn’t for everyone, and in some cases, it can actually impede your journey to wealth. However, when done properly, there are many ways that homeownership can be one of the biggest catalysts to your financial success.
Put simply, homeownership “forces” you to invest each month. Housing costs aren’t optional, whether you opt to pay rent or make an equity-building mortgage payment. These automatically become your top budget priority, no matter the financial situation. With a mortgage, though, you are building something each month that you can draw from in the future.
While saving and investing should always be an important part of your monthly allocation, these can be easy to forgo when unexpected expenses pop up or money gets tight. If you’re the type who has ever skipped saving “just this month,” a mortgage might be the foolproof choice you need.
Homeownership also builds wealth thanks to the housing market. While this has a lot to do with what, when, and where you buy -- and there are always temporary downturns -- the market as a whole is on a steady climb. It’s very likely that the home you buy today will be worth quite a bit more in 30 years, leaving you with a large, all-equity asset.
Buying a Home vs Renting
Many Americans struggle with the idea of buying a house versus renting. Renting may seem cheaper -- especially in terms of insurance, taxes, and maintenance -- but for many, homeownership is actually the fiscally-responsible option.
It’s important to look at your own personal factors before deciding whether investing in homeownership is your best path toward wealth, versus renting. This means looking at prices (and property taxes!) in your city, as well as local market trends.
Things to Remember
There are a few things to keep in mind if you want to maximize the impact that buying a home can have on your wealth-building.
The first is that, unlike an investment portfolio or savings account, your home will not be a liquid investment. So, it’s still important to create an emergency fund and have other savings in case of unexpected situations. Don’t put all of your eggs in one basket!
There’s also the concern of natural market declines. These are usually temporary, but can be an issue if you need to move or sell your home in the midst of one. The easiest way to avoid this is to buy for a great price and plan to hold onto the home for many years as you build equity in your investment.
Buying a home isn’t for everyone. For many Americans, though, homeownership can be an impactful factor in their wealth-building journey.