Even before the coronavirus pandemic, the American dream of owning a home was difficult to achieve. But for many millennials (out of 26 and 40 years), the The goal of buying a home seems to be out of reach at the moment, and many face a reduction in their income, or lack of it, and the shortage of initial homes .
A recent Bankrate survey found that nearly 60% of Americans between 18 Y 34 years have put off an important financial goal, such as buying a home or car, in the wake of the pandemic. More than half of those who have delayed buying a property think they will wait 9 months or more.
More than half of those who have delayed the purchase of a property expect to wait 9 months or more.
These postponements increase the risk that many millennials fail to achieve financial security. After all, buying a home is still the number one way to build wealth for most Americans, and home equity accounts for the majority of families’ net worth. (PDF).
Despite the obstacles, a large number of younger families have been buying houses . But overall, the proportion of millennial homeowners still lags behind previous generations , particularly in the case of people of color and families of low income.
The good news is that you don’t need to own a home to achieve your financial goals. “Renting can be its own path to financial security,” says Kevin Mahoney, a certified fee-based financial planner in Washington, DC
But you need a plan, like the one we’ll explain.
The real value of owning a home
It may seem contradictory, But the biggest financial benefit of owning a home is not about the home itself. “Owning a home fosters a mindset of discipline and savings that is critical to building financial security,” says Jay Abolofia, a certified fee planner in Waltham, Mass.
Undoubtedly , the value of the house is also important. But in the long run, home prices have historically followed inflation, with booms and busts in the meantime. At all times, you will pay high costs, including those covering maintenance, property taxes and insurance .
“Owning a home is more of an expense than an investment until you sell it, probably when you retire, and discover how much capital you can take advantage of,” says Abolofia.
Because of those mortgage payments, homeowners are forced to live within their means and constantly set aside resources, which helps build wealth, says Ryan Firth, a certified public accountant and fee-based financial advisor in Houston.
But renting also has economic advantages. In many high-cost areas, renting is cheaper than buying and maintaining a home. That means you’ll have more cash to direct toward your financial goals.
Renting also offers greater financial flexibility should you have to move, says Mahoney. Young adults, who may consider many life changes, such as changing jobs or getting married within a few years, are particularly prone to this.
What to do
Develops a saving mental structure. Start by analyzing your budget to free cash , a process that may have started during the pandemic. Take into account essential expenses, such as rent and water and electricity services, that have increased or decreased. You may be able to save on discretionary spending by just traveling and eating out less.
You’ll get the biggest impact if you cut expensive items, but don’t overlook the smaller expenses that go away adding, like your streaming service subscriptions .
If not You find a lot of room for maneuver in your current spending plan, don’t be discouraged. Concentrate on saving as much as you can, even if it is a few dollars a week.
“The most important thing is not how much you save, but to develop the behavior of long-term savings”, says Meir Statman, professor of finance at Santa Clara University and author of “Finance for Normal People: How Investors and Markets Behave.” (Oxford University Press, 401).
Gradually increase the amount as you get raises or receive unexpected income. Your goal is to divert the money you would spend on paying off a mortgage and turn it into savings.
You may also be able to get help under the recently enacted law: American Rescue Plan , which offers help with additional stimulus payments, child care tax credits, rental assistance and more.
Face your debts. You may not seem to be making much progress with savings if you have a lot of debt, such as student loans, as many millennials at the moment. But think of it like this: if you are managing to pay those amounts, it is also a form of investment.
“Your debt payments give you a guaranteed rate of return, similar to buying a bond with that interest rate, ”says Abolofia. For example, pay off a credit card balance with an interest rate of 16% equates to a return of 16% on that money.
Many planners suggest paying off credit card debt with fees first. higher. But some people are more satisfied with paying off smaller balances, even at lower interest rates, because they can be eliminated more quickly. Either way, keep cutting back on those balances.
Make the most of your 401 (k). If your employer offers a Retirement Plan 401 (k) with a contribution Employer equivalent, which most do, tries to contribute enough to get the full amount. It’s free money that can grow protected from long-term taxes.
Try to increase the amount you keep over time, perhaps 1% or 2% a year. Most plans allow you to schedule these increases automatically and you probably won’t notice the difference on your paycheck.
If your cash flow allows it, save additional money in a Roth IRA, says Abolofia. While those dollars are contributed after taxes, you will likely have a lower tax bracket when you withdraw the money in retirement, and that money will grow tax-free. In addition, you can withdraw contributions from the Roth IRA account at any time without penalty or taxes, which gives you liquidity.
If you do not have a retirement plan at work or you work for independently, you can save on your own in a IRA or a 401 (k) individual , which allows you to save important amounts in tax-protected accounts .
Get higher rates for your savings. Long-term savings are great, but generating short-term savings is also crucial, either for an emergency fund , a wedding or an advance.
To get the best performance from that money, choose an online savings account. While interest rates are low right now, these accounts typically offer higher rates than traditional banks, says Ashley Dixon, a certified fee-based financial planner in Colorado Springs, Colorado.
Ally Bank and Marcus by Goldman Sachs, for example, were paying an interest rate of 0.5% recently. In contrast, the average national interest rate for savings accounts is only 0. 06% , according to the FDIC.
You can compare rates for online savings accounts on websites like bankrate.com and depositaccounts.com.
Invest in your career. Developing financial security is not just about saving; you also need your income to keep growing. That may mean changing jobs, perhaps just changing employers or moving to a new industry.
Many young adults are likely to change jobs in the coming years, based on a recent Gallup poll . Millennials are 3 times more likely than older workers to say they have changed jobs in the past year, have 10 percentage points less likely to expect to be with their current employer in a year and more likely to be looking for a new job, he found Gallup.
Having flexibility as a tenant can be an advantage for young adults looking to build a career. If you have to sell a house, perhaps losing, it can be difficult to make the switch, Mahoney says.
Renters may also have more cash in their budget to pay for classes or get a graduate degree, which improves your job prospects. For them, as for homeowners, it helps to plan for the long term.
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Consumer Reports has no financial relationship with advertisers in this site. Consumer Reports is an independent nonprofit organization that works with consumers to create a just, safe, and healthy world. CR does not endorse products or services and does not accept advertising. Copyright © 2021, Consumer Reports, Inc.