How much of your money is tied up in the home you live in? And, do you think of it as an investment or as an expense?

In this episode, I'm going to tell you the three things I need you to know about the home you live in, and why it is in fact NOT an investment.

It's important to understand how your home features in your financial life, so that you can make the best and most informed decisions for your future.

Show notes:

• [02.48] The three things I need you to know about the home you live in

• [04.37] Re-thinking your home as an expense rather than an asset

• [05.16] Re-thinking what determines whether you can afford the buying of a house

• [10.34] Re-thinking what you need

• [13.40] What to do if you're currently in a house you can't afford

Quotes

"The bigger your house is, the bigger the operational expenses." - LIsa Linfield

"Change your thinking about your house - start seeing it as an expense." - Lisa Linfield

"You need to downsize." - Lisa Linfield

"If you're not on track with your retirement, and saving and investing at least 20% of what you earn, and can still afford to keep saving and investing at least 20% of what you earn, then you cannot afford the new house. Regardless of what the bank or estate agent tells you." - Lisa Linfield

Related posts and episode

• How to invest in property on a budget with Tiffany Alexy

• Four things you need to know about your home(financially)

• Passive income through property with Tamar Mar

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TRANSCRIPT

How much of your money is tied up in the home you live in? And do you think of it as an "investment"?

The Average Dollar Millionaire has less than 10% of their Net Worth in the home they live in….

So we all need to understand how the houses we live in feature in our financial life.... because when we think about them correctly... it's like a light switch goes on!!!!... and it helps us make the best-informed decisions about them

There are not many people I know that don't want to live in a nice house, in a nice suburb, with nice neighbours, close to the places they need to be. I mean, who wouldn't right?

And most of us can tell a story of upsizing our home - from our first little flat or townhouse, to a small family home, to a bigger one.

And if not actually upsizing, to looking for a home or feeling that pang in your tummy when you go to friend's homes.

And truly, we can't be blamed for that. We look at how hard we work, and others around us, and we fall into the thinking pattern that says "darn it, I work so hard... if they can have that, so can I".

Literally, just last week I had lunch with someone who had moved into one of the more expensive housing estates in our village, and she was describing all the kids playing soccer together, and I felt myself thinking "I should have bought there... I can afford it... so why did I buy the small little place in the tiny estate????

But there are three things you need to know about the home you live in

1. It's not an income generating asset. It doesn't produce income while you sleep. And you can't stop working and rely on it to pay your expenses. So, it can't experience compound growth and make gazillions of money babies that can give you financial freedom

2. The bigger your house is, the bigger the operational expenses. More roof to leak, more garden to maintain, more lights and heating to run up your electricity bills, more value to insure, and more mortgage to pay interest on.

3. And that means that not only is there less money to invest towards your financial freedom, you have a double whammy that you need more money invested to retire and maintain these expensive homes. This last point is where people tell me that no, when they retire, they will downsize their homes, releasing capital, for a retirement home. The problem with this is that whilst you may get a smaller sized home, they are way more expensive in retirement villages and have way more ongoing costs... so I never allow my clients to budget on releasing cash.

So here's the question… when you think about your home, do you think about it as an asset, part of your wealth, or do you think about it as an expense?

So the very first and most important piece of advice I have for you is CHANGE YOUR THINKING about your house. Start seeing it as an expense that you want to minimise rather than an asset you tell yourself is part of your wealth.

Truly, it's one of the big lies TWOT tells us - and once you change the way you think about it, you will start being real with the decisions you need to make.

So if the first thing is to rethink your house as an expense, the second is to rethink what you can afford as a criteria for buying a house.

One of the biggest places we take our guidance as to whether we "should" buy a house from is estate agents and mortgage lenders. We go to their calculators or sales staff and ask them "How much can I qualify for" and use that as our target.

Now that's a bit like asking a fox to estimate how many chickens can fit in a chicken coop!!!!!

They make their money by convincing you that you should take the highest possible loan allowed.... and it's never within the context of your life goals of financial freedom... or within the context of what the higher municipal taxes, insurances, electricity etc will be.

I'd just started in the Financial Planning Business, had a beautiful 8600 square foot (800m2) home in one of the best suburbs in Joburg, huge garden and pool, and lived right near the private girls school my girls attended. As far as location and size went, this house was perfect.

Whilst it was expensive, I was making ends meet... and assumed I could afford it. Until I read "The Millionaire Next Door".

And Fact after Fact came through and smacked me - making me realise it was seriously only God's grace that enabled us to be in a good financial position... but two really struck me

- 50% of $ millionaires have lived in their home for more than 20 years. In fact, moving house to a better neighbourhood was the quickest way of ensuring you DIDN'T become wealthy (because of the added expenses) AND

- they have more than 6.5 times the wealth of their neighbour

Well I failed the first one, awith our expensive neighbourhood - our running costs were THREE TIMES our old little house... and I'd just seen an advert for the house across the road, and I absolutely guarantee that we were no where NEAR 6.5 times as wealthy as our neighbours.

I knew if I was honest, the criteria I had used when buying the house was that we could afford it when we bought it… and the bank gave us a mortgage - so they must have thought we could afford it.

We could pay the bills for it, yes, but the amount we could and should have been investing at that time was significantly reduced because it went to paying off the bigger expenses and paying off the bigger mortgage - putting more money into an asset that doesn't generate cash.... rather into assets that will pay for our financial freedom.

If you are not on track with your retirement AND saving and investing at least 20% of what you earn, and can still afford to keep saving at least 20% after you buy that new house, you can't afford that new house... regardless of what the bank or estate agent says.

I have a couple whose financial plan I did right in the middle of their house purchase. Their companies were doing well, there was extra cash, and that extra space would have been wonderful for their two busy boys. BUT, they were way behind on their retirement saving.

I managed to convince them that not to move, to double their savings to 40% of salary rather.

A year and a half later, Covid hit. And their income halved, so they wouldn't have been able to keep paying for the bigger house if they had it. And they needed to halve their contributions. But because they'd contributed so much pre-covid, when the markets rebounded, their investments grew significantly.

Just as they were telling themselves it was an anomoly, and things were back on track, their business lost two of their biggest clients... and their incomes were reduced again.

Because they had a smaller, almost paid off house, they have managed to survive Life Happening, AND continue to contribute to financial freedom

So here's the question… do you think you're worth 6.5 times your neighbours, and are you currently saving 20% of your pre-tax income?

So you need to rethink your house as an expense, and rethink what you can afford…

... The third thing is that you need to rethink what you need.

Many people upsize their homes based on either their income growing (as we discussed before) or their children growing

Most do it when their kids are little and need space to run. Or alternatively when they are teenagers.

The other day I went to visit a new client in what I thought was a perfect spot. Absolutely, there was very little garden, and I could totally see that it could feel a little cramped with a bunch of teenagers if both kids had friends over… but this was a perfect long term house.

But she was adamant that they needed to move. That they wanted their kids' last few years at home to be just perfect with lots of their friends coming around.

So I asked her to think 6 years out when the kids were both at university away from home, and then 10 years out when the kids had moved out to their own homes, and where would she want to live.

And as she described that, she realised what I saw - that the house they were currently in was perfect for their life. Just not right now.

So I got her to commit to considering renting the bigger home for the next 5 years whilst renting theirs out.

It turns out that she could rent a perfect bigger home a little bit further out of town for less than she could rent her current house out... so she was able to have BOTH the bigger place AND her long term place without losing money to buying and selling and without increasing her monthly costs.

Many cultures and older generations highly prize home ownership, and the status of owning a house… and a big one at that.

I have to admit, I also held that opinion, and hence our big house in Joburg.

But the more people's money I look at, the more I think there's HUGE value in renting in many areas - because it's cheaper than owning - and often a house that you'll only need for a small season.

Keep your small house so you own a property you can always return to, but if you really do need more space, or want to be in a better school district, RENT.

So as you go through the week, think through what your attitudes to renting are… and what you think of others who rent… understanding your money mindset is crucial!

So what happens if you aren't able to save the 20% minimum you need to save for retirement? Or your house expenses have risen so much, you can't afford it?

Downsize.