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Two of the largest purchases we make during our lifetimes are a car and a home.
Both are huge expenses, often eating as much as 30% to 40% of our salaries while our retirement savings often make up less than 20% of our salaries! Yet both a car and a home are terrible investments. In fact, they are not even investments – they’re just expenses. With a car you are guaranteed to lose you money.
A house will see you worse off as an owner than if you rented in almost all situations. Yet we continue to buy them.
Now, first we have to accept there are emotional reasons for wanting to own a home and practical reasons for owning a car.
But we can still approach this situation in a smarter way and be emotionally secure, have transport and end up richer because we made these purchases in a clever fashion.
The first point of buying a house is don’t, rather rent. Recently, I was a guest on a podcast in which this was discussed at length. In the follow-up podcast we discussed the very few instances in which owning a house was better financially than renting. But as I mentioned, owning a home is often more about emotions and feeling secure rather than being money wise. So if we are going to buy a home, be smart about it.
1. Buy below your means
Be realistic about how much you can afford. Owning a home is not just about paying the bond. Expenses also include rates, taxes, insurance, upkeep, levies, cost of the purchase and eventual sale. But the biggest mistake we make is deciding we can afford e.g. R1m if we stretch the budget, then we look at a house for R1.1m and end up buying one costing R1.2m.
We’ve already blown our budget, and we haven’t moved in yet. If you think you can afford a R1m house, be realistic and buy one for R800 000. If you spend R200 000 less on the house, it is not likely to have a huge impact on the quality of the property, but it will make a massive difference to your pocket.
2. Pay more than just the bare minimum into your bond
Having now bought a home, immediately start paying an extra 10% on the bond every month – this is why you bought a cheaper house, so you could afford to put more into the bond. Then after one year increase your monthly bond repayment by whatever your salary increase is and continue doing this until the bond is paid off. These two simple tricks will shave years off the repayment period, potentially reducing a 20-year bond into a 10-year bond. Even just moving the actual date you pay the bond every month forward to the same day your salary is paid can take a few months off the repayment period.
So now you can pay the bond off relatively quickly.
3. Stay put...
The next trick is to stop moving. Typically, we buy a new house every seven or eight years. That hurts. We’re continually paying agent fees, transfer costs and bond registration fees that really add up.
4. …for decades
When you buy a home, make sure that you really can live in it for a few decades, so you actually get to have some bond-free years in your house. Otherwise you will end up paying a bond forever and never owning a home. This is the unfortunate reality: we buy a home on a 20-year bond, but we probably spend 40 years or more actually paying off a bond as we keep moving, upgrading and incurring new expenses.
Buying a home is seldom a good investment, so we need to do it right. If we’re clever about it, we can reduce the expenses, leaving more money to invest for our retirement. I will cover buying a vehicle in an upcoming column.
This article originally appeared in the 13 October edition of finweek. Buy and download the magazine here.
