Here's an important money question: Is homeownership the best path to [Music] wealth? BR, I am so excited to talk about this because we hear a lot of personal finance creatives, and really the American populace as a whole, talk about homeownership like it is the end-all

be-all to wealth creation and to being able to build wealth. And so in today's show, we want to put that to the test: Is that in fact true? Well, I've I've often wondered, is it just because people don't save and invest money, you know, because a

lot of people will buy a house because it's just part of what you do as you go through life, but very few people actually let their money start doing the work for them. So this will be a great experiment to say, hey, let's actually separate the different behaviors you can

do, whether it's renting and investing or whether it's buying, or if it's one of these people, because there are debt crusaders that just go hog wild and try to pay it off as fast as possible. I can't wait to see the answers. Yeah, and

the and truthfully, personal finance is personal, and so it may turn out that the right decision for one person might not be the perfect decision for another person. So we want to dive into that and see how making one small decision, or really one large decision for most folks,

the largest decision they'll ever make in terms of dollars and cents, how it can impact your financial life. But you know what another decision you can make that can have a huge impact on your financial life? I can't wait to hear this, so subscribe right now to this channel so you can

stay up to date on all the content that we put out there so Brian you've already set the table here you said let's talk about the three different options that generally exist when it comes to housing what are those three options yeah we got Nancy who never bought a house and rents

but here's the good news because I know this is a lot of young people are struggling with housing Market's gotten a lot more expensive Nancy's saving the down payment and she's investing all the difference between what she brings in and then she pays in rent and then

you've got John who bought a home and he pays it off in the traditional 30 years we also assumed he bought the house with 3% down you know cuz we wanted to make this minimal and then we moved to the third one which is Earl Earl bought a

home but he is a debt crusader and he's going to take up to 50% of his income to pay down that debt as fast as possible and get that mortgage wiped out so let's walk through our assumptions for this case study let's assume that all three

of our individuals have a household income of $120,000 their home if they were one of the two that bought a home they're going to have a mortgage payment equal to 25% of their gross income so it's going to be $2,500 we're going to assume they put

3% down we know right now the mortgage rate on a 30-year fixed mortgage is 6.79% and so that means that they're going to be able to buy a home that's worth $374,990 and we're going to assume for

Nancy, who decided not to buy a house, is going to pay the median rent in this country right now, which is $2,050 a month. So when we lay out these three individuals, Nancy rents for $2,050 and she invests 25% of her gross income

plus the differential between the rent payment and what the mortgage payment would have been had she bought. So in total, Nancy is going to invest $2,950 every single month. If I could whistle, I would. So now let's look at John. John is going to spend $2,500 on housing, that's

the 25% he's following the Money Guy Rule, and with the other 25% he is going to save and invest that. So John is just going to plan on paying the mortgage on its normal term over a 30-year cycle. And then we have Earl. Earl, you've

already mentioned, is a debt crusader. He's going to put all $5,000, 50% of his monthly gross income, toward his home. Then once it's paid off, he's going to begin investing all of that. He's going to invest all $5,000. So the question

becomes which one of these ends up better, who ends up in the better spot? Well, if we just look at the data, we just look at the raw numbers, we can see that after 30 years, Nancy does not have a paid-for home. She has been renting the

whole time, and we'll continue to do so. But because she's been saving and investing, she has actually been able to accumulate a portfolio worth over $45 million. So certainly attaining a high level of wealth was possible even though Nancy was renting. Now, I think

It is we need to note she did put down $1,226 as a house down, I mean not as a house down payment, but that went into the market. She didn't have to come up with the house down payment, and then we also used a moderate 8% rate of return

on growing the assets. We, of course, could have gone higher, but we wanted to keep it everything equal, so we kept it at 8% because that's pretty reasonable. So then we have John. John decided that he was going to pay the house off over the

normal 30-year period and been vested the whole time. Well, not only does John's house grow in value, remember he paid something like $330,000 for it and assuming the house just increased, the actual original value was $374,000, $370,000, and the house grows with

inflation, it's now worth over $900,000 and his portfolio has grown to be worth $4.6 million. So his, I'm sorry, his net worth is 4.6, total portfolio value of $3.7 million. So again, pretty solid, not

quite as liquid as Nancy, but a slightly higher net worth now. I will say it, it's kind of interesting to see right there that John is higher than Nancy. So there are some benefits Americans, I'm not disappointed because I think it's, it's part of the American dream. You want to

get the house going, but I do think it's, it's worth noting the spread is not as big as I think you would think. But let's, let's think about the debt crusaders. What does it mean for them because they're obviously, they forgoed investing

until they got this debt extinguished, and it is important to note we are in a unique time right now. Interest rates are a little bit higher, so this probably is going to minimize the behavioral impact of being so aggressive. Whereas if this was a lower interest rate, there might be a

different answer. Yeah, so when we look at Earl, what we can see is his house grew at the same rate as John, so at the end of the 30 years, his house is also worth over $900,000. But because he did not begin investing

as early as John, because he didn't have that time, his portfolio only grew to about $3.5 million. Now again, when we look at the total net worth, he still comes in second with a net worth of $4.5 million. What I think is wonderful

about this illustration is that all three of these individuals, because they were disciplined, because they were dedicated to saving and investing over the long term, I would argue all three of them were likely able to reach financial independence, whether they bought a house, did not buy a house, or how they

prioritized paying off the debt. In my opinion, this is really an example of how behavior over a long period of time can have a huge impact on your financial situation. Yeah, I mean I I I like the fact because we're going to talk about

there are huge benefits to homeownership and the fact that it does allow you to have stable housing costs. Go yeah, we go through an inflationary period again. You kind of like it when you have a house because nobody's raising your rent on that. There's also are some tax benefits

You get to deduct the mortgage interest you paid, property taxes that are deductible, and then of course you get the capital gains exclusion for $250,000 for an individual, $500,000 for a married couple. That's big to get out of taxes.

Completely on the appreciation of what could happen in the house. And then the third one, this is not necessarily a financial thing, but it is nice to take out the transient part of life where you're moving around all over the place, especially if you're raising a family.

You can grow roots, you can settle down, your kids can make neighborhood friends. There are a lot of those that aren't necessarily financial, but those are definitely benefits for having a house. Now, look, in reality, we recognize that this case study is super simplified. It's

not as easy as just looking at the hard numbers here, thinking about the tax benefits. We think that home ownership can be a wonderful wealth-building opportunity, but personal finance is personal. And so before, before you jump into home ownership and before you decide is this part of your financial

journey or should this be part of your financial journey, we want to walk you through some key factors that you ought to think about to determine, does this make sense for me? And one of the very first factors, and this is probably not going to come as a surprise, especially

in today's day and age, is where you live. Yeah, I was kind of shocked as we were meeting as a content team and when Megan showed me the contrast between the two cities we chose, it is shocking. And I feel for you people who live in a high

cost of living area is because the meeting housing pricing in some of these cities is it's just jaw-dropping and you know the easiest example I can think of is we looked at Los Angeles if you think about Los Angeles the median home price there is about

1.2 million dollars well the median rent to be able to rent a place in Los Angeles is only about $2,800 so there's a wide differential between these two if you think about buying a home in LA when you factor in the down payment of 3% plus

the closing costs you're going to have to spend $84,000 of initial costs and then over the life of paying the mortgage you're going to spend another $3,200,000 well at the end of that you are going to have equity built up in the

home and the home value will have increased but even when you back out the home value it takes about 24 years before it was more advantageous to buy in LA than it would have been to rent from in LA if you're only measuring it in

terms of capital outflow so if you live in a high cost of living area like that it makes a lot of sense likely to continue to rent over buying so we wanted to compare that so that way when people look at this is obviously where you live matters and that's why we want

to focus on this key point of the first factor is where you live but we want to contrast it with where we're from we're both from Metro Atlanta we're from the south side and look at this the median home price is $369,000 median rent is

$1,875, it creates a different scenario, yeah, when you think about buying a home in metro Atlanta. Again, if you factor in down payment plus the closing cost, you'll have a total buy-in of about $22,000. And then over the course of the

break-in period while you're making your mortgage payment, you'll pay in $445,000, but you will have built equity in the home of about $182,000. So when you track the math in metro Atlanta, if you can buy a home and

you can live in the home for at least 11 years, it's likely that you will have come out better owning the home than renting. So when you think about where you're choosing to live and whether or not you're going to buy a house in that

geography, it really depends on how high the cost of living in that specific area is. By the way, if you want to know one of the things we did to kind of help us with this calculation, the New York Times has this calculator where you can compare ownership versus renting, and

that's one of the things we used to kind of power this analysis, and it was very helpful. So you too can go out there and play around with that yourself. Now number two, here's the second factor: what you can afford. Yeah, so you may

determine, okay, well I'm in an area and home ownership in this area makes sense. Then you have to figure out, are there actually homes here that I can afford? And if you followed our content for any amount of time, you know we have a few rules of thumb, and one of our rules of

The thumb rule is that when it comes to buying a house, you want your monthly housing cost to not exceed 25% of your monthly gross income. So if you even decide that this is a place where you should live, then you have to factor in, can I afford to do it?

We have a great tool that can help you do that. If you go to MoneyGuide resources, we have a home affordability calculator that will actually walk you through it. You input the variables, you input your data, and it will show you how much can I afford based on my income, based on my interest

rate, based on the term of the loan I'm going to go with, to determine are there homes in my area that would satisfy the affordability? Yeah, and we wanted to make sure if you were asking yourself what, when they talk about 25%, what does that

include? We're talking about principal, we're talking about interest, we're talking about the taxes, and of course, the insurance. But there's a lot more that goes into housing, but we wanted to kind of show you, we know it's a unique time to be buying houses right now, so we

want to give you the definition of what 25% was. But especially since rates have changed so much, we have come, look, you guys know this because the majority of Americans still have mortgages that are less than 4.5%, but here we are in a market now

where rates are greater than 6.5%. Mortgage insurance rates impact your payment significantly. Yeah, it's wild when you think about, for the same priced house, if you were going to buy a $400,000 home, what that looks like from an affordability standpoint varies wildly based on the interest rate. If we

had a 3% interest rate like what we saw a number of years ago and you were again going to follow the Money Guy Rules and you were going to put 5% down and you were going to make sure that you're tracking your monthly payment with a 3%

interest rate is going to be a little under $1,700 a month. Well, the income that you would need to have as a household to be able to afford that home would be about $81,000 if interest rates were 5.5% now.

your mortgage goes from $1,700 a month to almost $2,300 a month. That means again to stay inside the Money Guy Rules you would need a household income of about $109,000 to make sure you're staying inside the affordability range and then

if interest rates are closer to where they are now, 7%, it's likely that your monthly mortgage payment is going to be almost $2,700 a month. That means that the income that you would need at those interest rates to buy the same size house, the

same priced house, a $400,000 house, is going to be nearly $130,000 a year. So interest rates can have a huge impact on your decision to buy and whether or not a home makes sense in your situation. What I'm amazed

by, Bo, is how fast this is all moving. I mean you would think that okay, when these guys talk about 3% rates, I remember that was probably like pandemic and before, but we have a great slide showing you this is in flux right now. We did from November of 2023 to now.

November of 2024 that's just one year and look at the spread here I mean this is significant we've got on the 30-year mortgage as high as 7.5% but there were periods and look I know that maybe because we're only looking at this on a

weekly basis there was a day or so where rates did go on a 30-year below 6% so we've seen massive fluctuations in just the 12-month period and hopefully that's going to settle down at some point but don't miss hear us look we understand

that housing is difficult and it's a hard decision and we're we're throwing these rules out there and we're giving you these parameters and these guard rails because we want you to stay inside of them we recognize it's not easy and it's difficult out there but far too

many folks are not doing this they're not not following these rules and we know that right now the typical home buyer spent 40% of their gross income on their mortgage payment in this last year and if you're spending 40% of your capital just on housing it begins to

crowd out all of the other financial goals you have begins to crowd out your ability to build and save for the future that's why we put these guard rails in place well I get worried about the people who cuz if that's just your principal interest your taxes and your

insurance what happens when you put in there the utilities when you put in there the the maintenance you can quickly see how housing can become 50% of your you know your take-home and then what scares me is that there are too many people that are house poor

and it puts you it squeezes you in to where you're not getting to save for the future you're not getting to build memories you're you're just you're on this treadmill to basically pay for the house we've got to figure out how we can

help people get out of that rut so we wanted to show you okay how much does this actually squeeze lifestyle if I am one of those first-time home buyers who's spending 40% on housing as opposed to only spending 25% on housing look at

this if we assume that you have an income of $100,000 and let's assume that interest rates on mortgages are around 6% and then let's assume that when you buy a house you're going to have about 1% of the value of the home in

maintenance costs you're going to have another 75 basis points or 0.75% maybe that's PMI that you're paying or maybe there's homeowner association dues that you're paying and you're going to come up with a down payment of 5% when we

think about affordability if I'm going to follow the Money Guy Rule and I'm going to say that I'm going to put 25% down that means that just my principal interest taxes and insurance are going to be a little under $2,100 a month the

average first-time home buyer last year went up to 40% in principal interest taxes and insurance that's over $3,300 a month well now when you begin to bolt on maintenance costs and then you add on PMI or HOA dues what you thought

was only going to be 40% of your gross housing cost is actually almost 50% even for those folks who stay at that 25% threshold when you add maintenance costs and when you add PMI and when you add these other expenses your actual gross

gets to 31% of your monthly take-home so when we think about housing and we want to stay inside the affordability range it would not be horrible of you to even be conservative to say I want my all-in housing costs to stay below 25% if that

were your goal then when you just think about principal interest taxes and insurance if you could even get closer to the 20% threshold you're just going to set your future self up for success to actually be able to save and build for the future uh I I think it's

important to say look we we are very sympathetic with how hard it is to to get into your first home right now but I also want to lean in and talk to my financial mutants who sometimes as you start getting pay raises and things are

going well you start getting that itch to upgrade and don't I I love showing this because you see the cost the cash flow impact on a monthly basis this is very important for you guys to pay attention to is because you there's so much of life if you're letting it all go

into housing you're creating a huge obligation for yourself and I think so many people we often say money is just a tool and and if you are losing focus on the fact that you have all your money going towards housing you have to go to

work, you have to wake up and go to a job, maybe you don't even love, but so you can afford this house, you're losing the flexibility. And I think what almost all of you actually are craving is the ability to do with your time what you

choose to do. And the sooner you can actually create margin in your life and actually control what you're expending to start saving and building your army of dollar bills, the sooner you'll be able to make decisions out of your choice, not out of obligation. And

that's why when people get into housing decisions where they're paying 40, 50%, it not only puts them on the dangerous edge of failure, because if all of a sudden you lost your job or any of the assumptions change, you'd be in trouble,

but it also puts you in this hole that you're that much further to having the margin to build your army of dollar bills and build independence. If we just think about the illustration we went through, we said that the monthly payment just looking at principal, interest, taxes

and insurance was something like $3,300. If you were like the average first-time home buyer last year that was spending 40% of their gross income there, if you could figure out how to maybe you buy the more reasonable home, you're not

buying the $512,000 home, you're buying the $260,000 home, that frees up about $1,500 a month in your budget. Well, that $1,500 a month can go towards retirement contributions, go towards groceries, go towards creating memories, go towards

saving for the kids go towards all of the other things in life that you want to fund We don't come up with the money Guy Rules as a means of putting a restriction or a collar around the things that you're doing We try to put them there to keep you from boxing

yourself into a helpless situation that you can't get out of And the reality is if you do find yourself in a situation where man the numbers just don't make sense I just can't make this work That's why we started with the case

at the very beginning showing that you don't have to buy a house you don't have to be a homeowner to be able to build to financial independence to be able to build for financial success There's nothing wrong with renting even if renting might be what you're just doing

for this specific and particular season of your life Yeah I think the bigger thing and it's what I was alluding to is what are you doing to watch the cost of housing versus everything else in your life and do you have enough margin to where you can own your life that much

sooner you know we But we did something key when we did that first analysis at the beginning we gave everybody the benefit of the doubt that they were actually optimizing their decision meaning that they were if you're renting then you were saving the the part that

was not going towards buying a house you were investing that for the future If you were buying a home you still were investing for the future even outside of the house even for the debt Crusader I think sadly and this is why we're the the third thing we want to talk about is

Factor number three, what are you doing with your margin? Is unfortunately for the majority of Americans, you guys, it's like an either/or. You're either choosing to be good with money where you have a house and you're saving and investing, or there's the other Americans where the

only decision they seem to be making is I'll buy a house, but they never save and build wealth outside of their housing decisions. And it's this is not just anecdotal evidence from us. Look at this. We actually have from the Federal Reserve data showing household

net worth as well as growth and financial assets inflation adjusted from 1989 all the way through all the way through through 2022. And what's really, really interesting is when you look at financial assets, these are checking accounts and savings accounts and 401(k)s

and Roth IRAs, those types of accounts aren't really increasing. So when we see individuals' net worths increasing, it's not because of the liquid assets in their balance sheet. What it actually is, the net worth that's actually increasing is just because of the housing decision

they've made because their house has increased. So even for folks that are able to make the decision and get into a home that they can afford, they're not actually taking that margin and applying it towards building for a great big beautiful tomorrow. And what's amazing is

it doesn't take a lot. A little bit can go a long way if you can just give it enough time to let it happen. Yeah, I mean it really does make me sad when I see all those, you know, big announcements where they say how much people's net

worths have gone up and I always the the cynic of me is like take out housing to see how much has happened and you'll see there's not so we actually wanted to go a step further we said okay look if if people the typical person is doing 40%

and we're saying it ought to be 25% that $1,500 a month that margin and we said but maybe that's too aggressive if you said hey $1,500 is too much money let's just take half of that half let's do

$765 a month cuz remember small incremental decision really do have huge impacts in your future life we said let's take 765 a month what does that look like in 10 years what does that look like in 20 years what does that look like in 30

years you guys are going to see the results of those small decisions just that one small decision again this is assuming you can earn 8% on average after 10 years just saving that $765 a month would turn into $142,000 by the time you make it to 20

Is Home Ownership the Best Path to Wealth

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Is Home Ownership the Best Path to Wealth

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