Most people follow a well-trodden path once they start working, but they find themselves stuck because of a common trap.
When a person starts working, they typically don’t earn much. After a few years, they get more established and perhaps climb the ranks or start a business and start making decent money.
It’s around that time they possibly look at getting married. From here, they will then look at buying a home and having kids.
For many people, buying that family home and embarking on that next stage of life is something they are really excited about. But the trap comes along by purchasing that owner-occupier home at that stage in their life.
Most people, will either buy a cheaper first home buyer-type property and look to upgrade, or if they are well established in their career, perhaps they can buy something a bit bigger and better initially.
While it’s great to have that security for your family and it’s even nicer to see the value of the home keep on rising, it could ultimately be the thing that is holding you back.
You see, most people will take on a lot of debt to finance that dream home, but they are stuck making the minimum repayments for the next 30 years.
What’s worse, you are also paying that money back with after-tax income.
What we know is that if you were to pay your home off over 30 years with your income, you are effectively paying a lot more for that property.
While you bought the property for $2 million, it could well be costing you more like $6 million to actually pay it off when you factor in interest repayments and taxes.
That’s a lot of money.
A lot of people come to that realisation when they are starting to think about retirement.
They quickly discover that all their money is effectively tied up in their home. Sure, it’s gone up in value and those gains are tax-free, but they are stuck.
There’s too much pride on the line for them to downgrade their home and access that money, so they are forced to carry on. They really don’t have a plan to get out of that situation, meaning they must keep paying off the mortgage for longer, and any hopes of an early retirement are dashed.
People will also keep on buying a bigger and better home when they do see their income increase, so the spinning wheel keeps on going.
Always trying to keep up with the Joneses and just getting by in the process.
Effectively it leads people to feeling like they are broke forever, even though they have some equity that they’ve built up.
So what can you do about it?
The first thing is that you need to take a look at whether the constant drive to keep up with the Joneses is actually serving you well.
What if you didn’t upgrade your PPOR and instead looked to start building an investment portfolio? Perhaps you don’t buy that $150,000 car and instead use that cash to invest.
If you wanted to take it to the next level, could you actually rent instead of own?
By rentvesting, you are still able to access the lifestyle that you want in terms of living in a good area. But you get to invest at the same time and build wealth in a smarter way.
Everyone’s situation is different, so there is no one way to do things. But you do have to realise that if you follow the same path as the 99%, then you will get the same result as them and never shake that feeling of being perpetually broke.
Engaging a trusted buyers advocate through Henderson’s buyers advocacy service is your best chance at navigating the competitive real estate market.
