Opinion & Analysis
There is a great financial divide between those who end up well off and those who do not. It is a gulf that opens up and then continues to widen over a long period of time. It starts and ends with home ownership: Those who can get themselves together to buy a house end up with more than those who do not.
This is not simply that home ownership is better financially than renting, but rather that developing discipline and good habits from saving for a deposit and paying a mortgage make them a world apart. And it is these habits and discipline which are your greatest asset - if learned at a fairly early age, they create an ever greater divide later in life.
Money management is simple in principle: you save for a house deposit, buy a house, work hard to pay off the mortgage and then start to invest. We all know this - we all know what we should do - but we do not do it. Why? Because we do not have the ability to commit to a goal and/or we lack the habits and discipline.
It is not knowledge that holds us back from financial success - it is our attitudes and our habits.
Good habits are best learned young: Being able to save the house deposit indicates whether someone has the right habits and discipline - and success with saving the deposit will establish and cement good behaviours which will last a lifetime.
Think of two different young couples both renting apartments: The first of these couples considers home ownership and, having calculated they will need to save a deposit of $40,000, realises this will take three tough years of saving. That seems too hard and with so much to tempt their discretionary dollar (travel, nights out, technology and so on) they give the idea away.
The second couple, however, commits to owning a house and starts saving. With time, saving becomes a habit and is easier - although it is hard graft, they manage to buy a house.
The first couple carries on renting. Renting is cheaper than owning - the rent this couple pays is significantly less than the mortgage, rates, insurances and maintenance the second couple pays. However, although they are paying less for their housing than the owning couple, they do not save the difference - instead, their consumption is higher.
The second couple now has an enforced saving plan called a mortgage. They have no say regarding whether or not they will save - the bank simply demands that they do by requiring monthly mortgage payments. Regardless, of what happens to the value of their home, the second couple's equity is getting greater simply because they are paying off the mortgage.
Even better for the home-owning couple, they use the good habits and the discipline they had to develop to save the deposit so that they increase the mortgage payments when they can.
The home-owning couple's most important asset is not, in fact, the home that they own - it is the habits and discipline that they have developed along with the confidence that they can be financially successful.
Although these soft assets of discipline and good habits are most important, the hard asset of home ownership is also important. The home-owning couple has something which is likely to grow in value and the debt will decrease in real terms with inflation as well as with the enforced mortgage payments.
And so the gulf widens. Even if the renting couple do eventually wake up, buying a house will be even more difficult - the house will now be more expensive but worse, they will have poor spending habits and be used to consuming their entire incomes with no surplus.
I think buying that first house is critically important. You could do numbers to show that renting was cheaper than owning and that if the renter saved the surplus they would be just as well off.
However, experience shows that renters do not usually invest the extra cash that they have - we really do need to be forced to save by paying off a mortgage.
Ending up in rented accommodation in retirement with little else is not much fun. Better, instead, for a couple to learn the right habits when they are young by saving the deposit and paying off a mortgage.
Martin Hawes is an Authorised Financial Adviser and his disclosure statement is available free of charge at martinhawes. com. This article is of a general nature and no substitute for personalised financial advice.
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