Consider Holding 50% Of Your Home Value In Your Portfolio Before Buying.
Before buying a house, consider creating a robust financial foundation
Many who buy a home today don’t put down a 20% down payment because they don’t have access to that type of cash flow.
On top of that, they likely need a robust financial portfolio for their age bracket. Most are behind on retirement.
Being cash-poor is a common theme. You buy the house, and only a little else is left over.
I'll give an example.
A mid-30-year-old cannot travel, go out to eat, or pay for recreational activities because his money goes towards his home.
Furthermore, he needs his partner to maintain a stable job to help support the house payments, which his partner continuously fails to do, increasing the financial burden.
On top of this, his investments are near zero, and he’s quickly approaching his 40s.
This isn't a worst-case scenario situation, but it could be better.
He has a home, but he doesn't have financial freedom. He'd be better off renting or living in a cheaper home to experience life and stay on track with his savings goals.
What Happens When You Have 50% Of Your Home Value In Your Portfolio
Well, for one, you can breathe, but here are some other potential benefits:
Say you lost an income source; since you have 50% of your home value in your financial portfolio, you probably have a 6–12 month emergency fund. Worst case scenario, you use up your emergency fund before replacing your income; you have investments you can liquidate to cover your expenses.
You're not house-rich, and you're cash-poor. Once again, many people who own a home have little money in the bank or investments. When you have 50% or more of your home value stocked away, you have a more balanced and diverse portfolio instead of keeping all of your money in a physical asset that is likely not making you money.
Your money is working for you. If you're not using your home as a rental property or renting out rooms, you're paying the fees, which means the property isn't making you money. But if you have a robust amount of money stacked away in investments, that money works 24/7 around the clock, helping you increase your net worth while paying down your mortgage balance.
You maintain a positive net worth or stay close to it. Many people would need to sell their homes to have a positive net worth. And that's only if they don't have student loans, personal loans, credit card debt, car notes, and other types of debt. If your home is worth half a million dollars, and you haven't paid it off, you likely have a negative net worth. Yes, that home is appreciating. But it’s still debt until you liquidate or monetize that home (e.g., use part or the whole as a rental property), which means you're only partially financially independent.
I'm not recommending saving and investing 50% or more of your home value before purchasing, but I am putting it out there as a consideration.
If more people did this, they'd experience less financial anxiety, more financial freedom, and pay off their homes faster.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.