What Separates Success From Failure in Money Management?
Investing is important. We hear it time and time again. The great wonders of compound interest. The significance of saving and investing over a lifetime is paramount.
Yet despite all the so-called passion around saving and investing, I hear very little discussion about where to start investing.
For many, investing begins first by saving. Putting your dollars to work for you. Many of the self-proclaimed "guru investors" will be quick to point out that you can invest first without saving. This is called investing on margin. It's actually what most of us do when we purchase a home.
A mortgage is actually an investment on margin. We borrow money that we don't yet have to purchase an asset that we hope will appreciate in value over time. For those who want to learn more about mortgages, check out this article.
I am a strong advocate that the only thing to ever invest in through margin is a home. Do not borrow money for cars. Avoid borrowing for clothes. Couches. Appliances. Sure, if you want to have a credit card and pay it off in full at the end of every month, have at it Hoss. I highlighted the benefits of a paid-off-monthly credit card in this article.
Alright, I know by this point many of you want the answer. The answer to the highly controversial question: "What is the most important investment decision of my life?".
Technically, the answer to that question is not anything tangible or a commodity purchased with money. The best investment you can possibly make is in yourself. I am the furthest thing from a soft and sentimental man, but I truly believe this is the honest truth. Investing in yourself through acquiring wisdom, attaining improved health and fitness, and building foundational relationships is the single most important thing you can do in your life.
That aside, I do believe that their is a less-important monetary decision that dramatically affects the trajectory of most young individuals' and couples' financial journey.
The Purchase of Your Home
I previously wrote about why a house is an investment, not a liability like many experts would argue.
So why am I writing about it again? Truth be told, I do not believe that purchasing a home is directly what generates wealth and increases net worth. I do not believe that a home is a significant appreciating asset either.
Rather, my belief is that the purchase of a home has the power to indirectly make one wealthy. One might ask "How is that possible?".
Let me explain. The purchase of your home, particularly your first home, sets off a chain reaction. Many of the successes (or failures) of your future financial journey depend on the decisions you make when you are young.
If you overextend yourself on the purchase of your home, especially your first home, you dramatically reduce the power of your savings. Trust me when I tell you that nobody actually cares what house you are presently living in. Nobody cares how many square feet it is, how many bedrooms it has, or if it has a pool or exposed wood beams. Truth be told, the only person any of these things should ever have any meaning to (aside from yourself) is whoever buys it from you some day. That's it. So technically, you need two people ever to value your home: YOU and YOUR FUTURE BUYER.
With that out of the way, the single most repeated mistake in American society is over-mortgaging themselves on a home. This is commonly referred to as being "house-poor" or being "married to your mortgage".
Even worse, the buck doesn't even stop there. Aside from a larger mortgage payment per month, you also will suffer the following:
All of this because you bought too much house. You spent more than you should have. You sabotaged your own efforts at saving.
If there is one thing that I consistently see that dramatically alters the trajectory of a financial journey, it is the purchase of your first-home.
If nothing else, making the decision to be practical and still leave plenty of room for investing while your are young, purchase far less house than you can afford. Plain and simple.
What would I do next? Invest the remaining savings in low-cost index funds. But hey, that's just me. Do whatever you want. I am no investment professional nor did I stay in a Holiday Inn express last night.
Until next time.
Dr. Jon is a physical therapist by day, and a dedicated frugalist by night, deeply enthralled in the thrill of "pinching pennies" and investing the margin.