The home-ownership lobby is strong.
“Why throw your money away paying rent?” “You’re only making your landlord wealthy.” So say friends, family and advisers … and yes, owning has some financial advantages in the long term, but, it’s OK not to own a home.
If you’re looking longingly at this crazy expensive real-estate market we seem to be in right now, wanting to get in but unable to afford the hefty down payment, I want to assure you that you can still build financial security without owning. Here’s what you can do instead.
Save the difference between rent versus the full cost of home ownership
In many cases, renting is less expensive than owning a home — given mortgage, taxes, maintenance, utilities, lawn care, insurance, the initial transaction costs and so on. If you’re keen to “keep up” with your owner peers, act as if you own, and simply save the difference between the total monthly rent and total of all ownership costs. For example, if rent is $ 2,200 and the full costs of owning the identical space tally up to $ 3,200, bank that $ 1,000 difference. If income losses due to the pandemic make that impossible now, keep this tip in your back pocket for when your earnings bounce back.
Don’t blow your pandemic savings
One of the perks of renting is having stronger cash flow than many owners who have overbought — they call it home poverty for a reason!
You may be one of those pandemic super-savers who kept working without any income reductions over the past year, and saw your expenses plummet (including if you renegotiated your rent), and thus are sitting on a pile of savings. I get the temptation to spend it — and BIG TIME: cars, boats and so on.
Strike a balance, though, between your financial progress and lifestyle spending. Using up all your savings will not help you build financial security. It will do the opposite.
And remember, renters still need a minimum of three months’ worth of expenses set aside as emergency savings. Further, if your goal is still to build up savings for a down payment for a home down the road when that market cools off, ensure you’re setting your money aside in a safe place, not exposed to investment market risk.
Be extra vigilant about investing well
Being a long-term renter means you don’t get to benefit from the appreciation of the real-estate market. But, it also means you’re not exposed to the potential depreciation that can occur. Where your financial growth can come from is the investment market, instead (and yes, this also exposes you to risk).
If you’re keen to convert your savings into long-term investments, do so with a rock-solid strategy. This entails understanding the benchmark rate of return (ROR) for your age and life stage (also known as your risk tolerance), keeping your fees in check, and ensuring that long-term you’re hitting at least the benchmark for both ROR and fees.
This guidance applies across every style of investment account you have, whether an RRSP, Group RRSP, workplace defined-benefit pension plan, TFSA or nonregistered investment account.
In almost every case, it’s prudent to seek professional investment advice before investing. You may end up with a robo-adviser in the end (kind of like investing on autopilot), and that’s OK. Still, get qualified guidance.
Carrying on from the earlier example, if you invested the $ 1,000 monthly difference between rental versus ownership costs for 25 years, at a six per cent ROR, it would grow to about $ 675,000 — WOW, right?
Strengthen your financial foundation by getting out, and staying out, of consumer debt
If you want to make serious progress on your money as a renter, tidy up all your debts and steer clear of new ones. You may need to consolidate and/or “up” your payments to become debt-free faster. And, going forward, only use good debt — financing for assets such as investments or a profitable business. Consult with your financial planner on using good debt before taking the plunge.
You’re geographically flexible. Use it to your advantage
Once more people are inoculated and workplaces reopen, you can and should consider working in places where you’ll be paid the highest for the kind of work you love doing. Many times, homeowners don’t move because they’re bound to their property, and thus their local work opportunities, unless they sell.
And it’s not just about work, either. You may want to live and rent somewhere that simply has a better quality of life for you.
Whether your heart is set on home ownership down the road, or you’re simply comfortable with being a renter, know that you can create financial success while renting. It will happen through a combination of debt reduction, and saving a bit more.
JOIN THE CONVERSATION
How do you plan to build your wealth? Share your thoughts