Ways to Build Wealth If You Can’t Afford a Home

(Bloomberg) – Home ownership has long been touted as one of the best ways to build wealth. But for many Americans, that path to financial security is increasingly out of reach.

Mortgage rates have just posted their largest weekly increase since 1987 and house prices remain high. Add to that the highest inflation in 40 years, rising student debt levels and wages not keeping up with rising prices, and it’s no surprise that many feel left out of the housing market. .

Read more: Millennials’ dream home crumbles again as US prices spike

This hits young Americans particularly hard, leaving them with fewer options to secure their financial future. So what do you do if you just can’t afford to buy a house? Here’s what the experts recommend:

Maximize your savings

The key to financial success begins with developing healthy financial habits early, said TJ Williams, regional vice president, Wealth Enhancement Group.

“The habits you create when things go wrong are a much better indicator of your financial success than anything you buy or invest,” he said.

This includes creating a budget that maximizes the amount of money you save and limits discretionary spending.

This might be difficult for those who live in expensive cities like New York and San Francisco. With the rise of remote work, some financial planners say it’s worth considering moving to the suburbs or a more affordable city to reduce the cost of living. If that’s not an option, Williams recommends limiting housing costs to just 28% of your total pre-tax income and living with roommates if necessary.

According to Sara Kalsman, financial planner at roboadviser Betterment, for millennials and millennials who have a lot of student debt, it’s essential to pay off high-interest loans as soon as possible. It’s not a “sexy financial goal,” but it does increase excess cash flow you can spend on retirement or investments, she said.

Use retirement accounts

Another route to building wealth is to contribute as much as possible to retirement savings accounts like traditional 401(k)s and IRAs — where you can invest pre-tax dollars and then be taxed when you withdraw the money. money in retirement – to capitalize on taxes. delayed growth.

For those lucky enough to have matching employers, Williams recommends maximizing your own contribution if possible because “it’s free money.”

Once your bills are paid and you have an emergency fund in place, it’s also a good idea to consider opening a Roth account, which allows tax-free withdrawals when you retire. , Williams said.

“Contributing to different retirement accounts is a very important thing both for someone building wealth early and for accumulating it,” he said.

Invest in a diversified portfolio

Historically, investing in the stock market has been a great way to build wealth, and exchange-traded funds offer investors low-cost diversification opportunities that weren’t available to older generations, says Amir Noor. , Director of Financial Planning for United Financial Planning Group. .

While the current market volatility could be bad news for those approaching retirement, young investors who have decades to build wealth should benefit from falling stock prices, according to Andrew Crowell, vice president of wealth management at DA Davidson & Co.

Crowell said rising interest rates mean now is also a good time for people to invest in a portfolio of low-risk bonds and Treasuries.

The benchmark 10-year Treasury yield is currently trading around 3.3%, a huge jump from 1.6% at the start of the year, meaning investors are earning more interest for holding government bonds.

Boost your earnings

Financial planners advise negotiating a higher salary whenever possible. This could be especially fruitful right now, with inflation soaring and the tightest labor market in decades.

Sometimes getting more education or additional training can help boost your salary. It’s also important to assess whether there’s growth potential in your current role – if not, you could make a career change that could pay off in the long run.

If you’re young and early in your career, experts recommend taking on a side job or extra work, with carpooling and food delivery companies making it easier than ever.

Home ownership

For those serious about owning a home, experts say it’s within reach if you start investing and saving for a down payment now.

With the housing market showing signs of slowing and recession fears growing, Crowell advises potential buyers to wait for home values ​​to drop in the next year or two.

Those betting on stock market investments for a down payment may find it more difficult as global markets plunge. Saving money might be a better option than being forced to sell when stocks are falling.

Remember that homes often come with additional expenses — including property taxes, insurance, and maintenance — that can cost thousands of dollars a month.

However, Williams stressed that owning a home is not a prerequisite for financial security. Think about what financial success means to you personally.

“A principal residence is not an investment until it is sold. It’s actually just a place to live,” Williams said. “Homeownership is a symptom of financial security – not a cause.”

To contact the authors of this story:
Paulina Cachero in New York at [email protected]
Claire Ballentine in New York at [email protected]

About Ian Crawford

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