One of the things I most looked forward to, in buying a home of our own, was having more freedom.
Owning, to me, was more than just about no longer having to pay rent, lining someone else’s pockets, but about having the ability to make the ‘house’ I lived in a ‘home’ – something a bit more personal – getting to paint the walls a different colour or put up pictures if I so chose.
And I think this is a common dream. Take the cliché ‘A man’s home is his castle‘. It encapsulates the notion that ‘One can do whatever one wants to in one’s own home’.
But is that always true? And are there other ‘castles’ you can build that give you even more freedom?
Equality and Housing
In my posts last week, I wrote about the ‘American Dream‘ – a familiar concept in many countries around the world. I mentioned the classic interpretation of this dream as one of equal opportunity and everyone reaching their potential, versus the more modern, more popular notion of the American Dream as the acquisition of a house and a car.
Yet even though it’s easy to see the two versions of the dream as opposing – one about being and one about buying as I put it – the two are fundamentally intertwined.
Widespread achievement of the modern, consumerist dream – of owning a big McMansion and a Range Rover or Jeep – is seen as evidence that opportunity really does exist for all. But of course, this isn’t the case. Not everyone has these things.
In terms of the equal distribution of wealth, the US ranks pretty poorly – far below the likes of say Hungary, where I am currently (which, like any country, has other issues of inequality that should not be glossed over), or my own native Australia, where inequality is on the rise. Is it any coincidence that home ownership rates are also lower in the US? Of course, the factors relating to home ownership are many and complex, but in an economic environment so unequally stacked from the outset that many cannot afford adequate housing, even this scaled-down version of the American Dream is out of reach.
Is your home an asset?
Many measures of household wealth include the value of the family home, and for most people, their home is their biggest asset.
But a home is a different kind of asset to a bundle of shares or an investment property or a term deposit – it’s not an income producing asset. Unless you are renting out a portion of your home, it isn’t bringing you any money, but is costing you money – council rates, maintenance, etc. And here we come to one of the reasons for the continuation of wealth inequality: ‘those who are not wealthy are more likely to have their money in savings accounts and home ownership‘, while the wealthy accumulate more income-producing assets which give them even greater wealth.
To put that another way: the more of your wealth that is tied up in non-income producing assets like your home, the less money you have working for you.
How do the rich keep getting richer?
Inequity in the distribution of wealth has many causes, among them differences in family background – receiving ‘a small loan of a million dollars’ or a large inheritance – taxation laws, and workers’ rights resulting in inequality in income. But most of these reasons boil down to the following: ‘the wealthy possess greater financial opportunities that allow their money to make more money’. While the majority work in jobs that pay them by the hour, the wealthy have money that works for them.
No matter how good you are at your job, and how much you get paid, there are only so many hours in a day. You will never be able to work more than 24 hours in a day, and at that, you’d soon become exhausted and no longer able to work. On the other hand, invested money has the potential to work non-stop, earning money for you every second of the day, even while you sleep. Naturally, investments can also lose money on your behalf, faster than you can spend it. But once again, it is the very wealthy who have enough financial resources to weather these storms, and often profit from them, buying assets cheaply from those who can no longer afford to hold them.
How it stacks up
Most of us certainly don’t have the financial resources of the top 1% – who posses 40% of all the wealth in the US. In Australia, the richest 1% own as much as the bottom 60% combined – and the single wealthiest person owns more than the least wealthy 2.27 million people (10% of the population).
Yet I believe the rest of us can benefit from examining our dreams in contrast with some little talked of alternatives.
The typical script – the one we normally hear about representing a ‘good’ life – looks something like this. Get married or find a partner, buy a house, have kids. Three major life events, not necessarily in that order.
An average person might buy an ‘average’ $500,000 house (depending on where they live) and automatically be in debt (with a mortgage). They will then spend a number of years – probably decades – slowly building up equity in their home – obtaining the rewards of price increases as they occur, but also paying rates and maintenance costs, and the big one – interest on their mortgage.
A wealthy person with, say, $10 million, could buy the same ‘average’ house, pay no interest if they don’t want to as they don’t need to borrow, and still have 95% of their wealth left over to invest in other, income-producing assets, which will easily cover the costs of their property with a lot of profit on top. More likely though, as a wealthy person, they will put down the minimum deposit possible and invest the money in a higher income producing asset instead which covers the mortgage payments with a profit to spare. Even if they buy a $1 million house, or a $2 million house, or a $5 million house, a smaller percentage of their net wealth will be tied up in their home than would be the case for the average person, who has almost all of their wealth in their home, and the wealthy person will still have much more – in dollar terms and percentage terms – to invest for profit.
But $10 million isn’t even that ‘wealthy’ compared to some.
The nine richest individuals in Australia have a combined wealth of $54.8 billion US. That’s around $6.08 billion each.
If you have $6 billion, you could buy the most expensive home on the planet, which reportedly cost $1 billion to build, and still have a cool $5 billion to invest. Even if you have a spectacularly poor year and only earn 1% on your investment, you would still earn $50 million. If you managed to get 10%, which isn’t unreasonable with the sort of stellar investing advice you should be able to afford, you would earn $500 million. And assuming you didn’t spend all of it (after all, I assume it gets tiring thinking up new ways to blow almost $1.4 million every day), that figure would go up every year as you reinvested profits. Of course, I haven’t factored in taxation here, but I’m sure you could find some offshore accounts to funnel your money through.
How can the ‘average’ person apply this thinking?
So let’s bring it back to a more realistic (for us) scenario – I doubt many of the 1% will be reading Enrichmentality.
Consider the following scenarios (very similar to the options my husband and I faced in real life):
- Purchase a home at, say $400-500,000. OR
- Purchase a small unit at, say, $200,000. Pay down the mortgage as rapidly as possible. Sell and upgrade to a larger house at, say $400-500,000. OR
- Purchase a small unit at the same cost. Pay down the mortgage as rapidly as possible. Keep living there and spend the money you would have spent on an upgrade on income-producing assets instead. Use the income from these assets to support your living expenses. Of course, you could also:
- Purchase a small unit at the same cost. Rent it out while you rent somewhere cheaper. Buy a second property, and rent it out too. Rinse and repeat.
From the outside, #1 and #2 look like the wealthiest option. You’ve got a big house, you’re living the life you’ve dreamed of. But #3 and #4 (depending on your/your family’s needs) are the wealthier mindset in my view. Your lifestyle may look modest to outsiders, but your property is working for you, instead of you working for it, and you have diversified your assets.
I began my post today with the saying ‘a man’s home is his castle’. But I prefer a saying from the enlightening book Millionaire Next Door, where one of the interviewees talks about people as having a ‘big hat’, but ‘no cattle’. These are the people who have the trappings of a wealthy life, and are more concerned with looking rich than being stable financially. Scenario #1 in particular exemplifes this type of lifestyle. We see a big house and assume ‘they must be rolling in it’. But scenarios #3 and #4 are examples of those who may have small ‘hats’, but are tending to their herds.
Is the ‘American Dream’ dangerous?
By encouraging people to dream big, to obtain houses larger than their needs, and to show off through other ‘assets’ that do not produce an income (and in some cases, like cars and clothes, normally depreciate in value rapidly), the modern ‘American Dream‘ or its local flavours may actually be detrimental to achieving the broader dream of greater equality by stretching the average person’s purse strings to the max and encouraging the accumulation of stuff over wealth.
In the US, the top 1% own 50% of the stock market. The bottom 50% own just 0.5%.
Given the extreme disparity in wealth, making the choice to scale back your dreams and invest alone isn’t going to dramatically change this makeup. Political, economic, and social reform is badly needed. But as we work towards that, we can also carefully examine the messages we are fed, asking ourselves ‘Is this right for me? For my family? Do I really need and want this? Is this my dream, or someone else’s?’ Why are these messages being promoted? Whose interest are they in? While we’re all out busily chasing the goals of a ‘dream home’ and a ‘dream car’ and locking ourselves into 30 year mortgages, working 40-80 hour weeks, we have very little time to pay attention and recognise the deep inequality in our nations.
I’ve talked here about the ‘average’ person buying an ‘average’ house. And for many people, these ‘average’ figures will look unachievable. They certainly did to me when I started work and my earnings were far below average, and when we bought our home, which, incidentally, was less than half the ‘average’. But the principle remains the same. Maybe you’re buying a car, or even a hat, not a house. Ask yourself the same questions. Why am I buying this? Is there something else I could put my money towards that would be of greater benefit?And we can ask ourselves ‘Am I doing this to look rich, or because it truly fulfills my needs and aligns with my purpose?’ In other words: am I putting on a big hat and forgetting about my cattle?
Are you considering buying a house? Check out this video on the variables you need to consider – keeping in mind that taxation and other rules vary considerably depending on where you’re based.
Is your home your greatest asset? Tell me what you think in the comments below.
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Today’s featured image is the fairytale castle-like Fishermans Bastion in Budapest.