Jennifer has had fruitful working life and is now due to retire. Her plans for retirement are to spend time travelling and visiting her children who now live in various countries and do some volunteer work. Jennifer has finished paying off her mortgage in her house in Langata. She is also going to receive a lump sum pension payment. Five years down the road Jennifer’s pension money is fast running out and she has to take a hard look at some of the financial decisions she made. While she was working, the biggest investment Jennifer made was her home. She ensured that she had paid off the mortgage so she would not have to deal with this debt in her retirement. However despite working so hard to totally own this so called “Asset”, she finds herself now struggling to meet day to day expenses including maintenance of this house. She now needs to work to keep the asset rather than the asset working for her.
So is your home an investment? An investment is something you enter into for the purpose of generating a return. The return can come in the form of income or realised capital gain when you sell it for a profit. An investment will put money into your pocket. The house you live in and intend to live in for the unforeseeable future does not fit into this description. You are not generating an income from it and you do not intend to sell it. When you decide to stop working your home will not fund groceries, electricity bills, and transport just by choosing to call it your biggest asset. Jennifer has to decide to either sell the house and use those funds to invest in something that will bring her a regular income, move out and rent the house or go back to work. Had she invested in other things that would now be giving her an income she would not be in the position she is in now. Whilst you are servicing a mortgage, this house is in fact purely a liability as it removing money from your pocket. A lot of people have dug themselves deep into debt by getting the home of their dreams and find that they cannot afford to do anything else after servicing the mortgage. Over that period the opportunity cost of time plus the type of investments you would have been able to do with that money far outweigh the financial value of the house.
Do not ever get comfortable thinking or planning for your home to be your biggest investment. The importance of owning a home has been drilled into us rather than the importance of creating value from investments. Most banks will advertise mortgages using the home aspect rather than the investment aspect. Even though you may want to own a home at some point, it really does not have to be the first thing you do. You can actually build up your investment portfolio aggressively and then buy the home later. If you do choose to buy a house remember, you still have to take part in REAL Investments that will give you financial security in the long term. Failure to do this will mean that the precious home will end up being given up just to sustain your lifestyle.
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