Retirement is one of the hardest things to save for because it's so far in the future, compared to today's priorities. Maybe you've got home improvements you'd like to make or you're building a house and trying to decide what features to upgrade. You home can provide retirement savings when you make improvements that build financial equity, provided you don't over-invest.
It's often said a boat is a hole in the water, into which you pour money. It's also common knowledge that a new car looses about nine percent of it's value the instant you drive it off the dealer lot. So it's no wonder that many homeowners don't realize their home is a great vehicle for saving money, through appreciation and home improvements.
Calculating Your Home's Investment Value
The three typical ways that a family can save for retirement are:
- Social security payroll deductions, deducted from each paycheck.
- Employment based retirement plans, deducted from your paycheck.
- Monthly mortgage payments are part living costs (interest) and part savings where you're paying off your loan balance, and at the same time building equity in your home.
There are two added financial benefits gained with a mortgage:
- Mortgage interest can reduce income taxes based on your marginal income tax rate, provided you itemize your deductions.
- Appreciation in home value is based on the full price regardless of your down payment. For example, if you buy a house for $500,000 and put 20% done, you're investing $100,000. You might earn 8 percent or $8,000 in the stock market for an investment of $100,000. By investing $100,000 in a $500,000 house that appreciates 2.5% (annually), you’ll grow your homeowner equity by $12,500 each year.
Ready to start rethinking how you look at home ownership costs?
Rethinking Home Ownership Costs
Many homeowners intuitively understand that owning a home is one way to build retirement savings. And you might even project your home's value growing at the same rate as inflation, or slightly higher. Now there's a visual calculator to help you explore these homeowner questions, using real data and projections covering everything from buying your home, to paying recurring costs, up until you sell the house.
The NY Times calculator was developed to help prospective home buyers decide if it makes sense to rent or buy. The calculator integrates so many homeowner expenses and economic projections, that it's also a good tool to help you look at the long term investment potential of home ownership. It's easy to use as you simply move the slider left or right, to reflect actual data or what you feel is a realistic projection, like growth in home prices. The magic is that you can see immediately how even minor changes affect the net proceeds after selling your house.
So let's look at all the costs and projections included in this calculator and sort them into expenses and savings. Information you need to provide the calculator that's neither an expense or savings are listed below (more details about this new mortgage calculator).
- How much you are paying for a home.
- How long you expect to own the house?
- Mortgage rate (the calculator doesn't support adjustable mortgages).
- Length of mortgage, like 30 years.
- Inflation rate.
- Marginal tax rate.
While it's true you can't predict the future, you can invest wisely in a home or rent until the market is more affordable (that's what the NY Times calculator is for) . It means buying a house that fits your budget, your lifestyle and the community where you want to live. It involves maintaining the house to protect your investment and making smart home improvements you can enjoy for years, and getting a return when you sell your home.
NY Times Calculator & Retirement Savings
Here are your typical homeowner expenses. By spending time playing with the NY Times calculator, you'll begin to see that the majority of your homeowner expenses are investments (savings).
Sure you'll have to spend time managing your home, it's maintenance and home improvements. You also have to manage other investments to achieve your retirement savings goals. Why not enjoy your investment now and in the future?
What are your biggest challenges with respect to home ownership?
Note: The ideas shared here are based on personal experience as a homeowner (15 houses and counting). I have no training and do not claim to be a financial planner.
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