Real Life Financial Planning

This past weekend my family has made the move into a new home, which needless to say, has been a chaotic process.  It really got me thinking, though, about real estate/home ownership and how it fits into client portfolios and their financial plans.

The mantra of the middle class is buy a home.  But is it always the best decision for your money?

Buying residential real estate certainly poses some undeniable advantages.  For many people, there is a certain pride in homeownership.  After all, it is the epitome of the American Dream.  Additionally, the interest and property tax portion of your mortgage is tax-deductible, and not unimportantly, homes tend to increase in value, build equity and provide a nest egg for the future.

But what is very often overlooked by the average American is the opportunity cost of their money and how their mortgages play a role in that.  A recent Wall Street Journal article highlights the important decision individuals face when they have excess cash.  It recommends taking a close look at what interest rates you pay on a mortgage and how those compare to the savings amount on your bank account as well as the rate of return on investments in equity and bonds.

When homeowners do this, they often are struck with a revelation: they are likely not getting as high of a return on their investment as they would have if they were invested more heavily in equity.  Ultimately, the opportunity cost of having your money tied up in your mortgage could actually hurt your long-term wealth.  Even worse, the tax breaks you are receiving do not cover the amount of loss incurred from your interest rate!  A recent Bloomberg article went so far to say that this simple understanding is one of the distinctions that separates the world’s wealthiest individuals from the middle class and one of the major contributing factors to income inequality.  Basically, it argues that a major difference between the middle class and the top 1% is that the middle class have too much of their portfolios tied in up residential real estate that is not providing adequate returns.

There is a theory out there that wealthy individuals are simply more skilled investors.  A recent study explains that this is not true. (In fact, they might be worse!)  Wealthy people just tend to own most of the equity in the economy, meaning that when business does well, they reap disproportionately large benefits.  Generally speaking, rich individuals own the upside of the economy in the form of stock, while the middle class’s gains are limited by the slow growth of housing wealth.  It is no surprise that the collapse of the housing bubble has exacerbated wealth inequality because stocks recovered more strongly than real estate did.  Maybe the difference between you and the 1% is just your perception of the options available to you.

Surely, shelter is one of the basic necessities of life.  Everyone has to live somewhere – but taking the time to consider all of your options before making any large financial decisions is something that every person should do.  At the very least, you should consider the opportunity costs of your cash and look into advantages of a less expensive housing option, renting, or investing more in equity to ensure that you are getting the most out of your money in the long run.

At Sherman Wealth Management, we believe that real life decisions call for real life financial planning.

These are the kinds of decisions we want to help you make, so don’t hesitate to contact us today to get started.


The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.


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