I can't buy a home, am I financially doomed? Episode 19

There's a template that all Australian's are meant to follow.

• Study,
• enter the workforce,
• buy a house,
• raise kids,
• pay off a mortgage,
• retire.

It's served us pretty well for the past 100 years or so, so you know the saying about if it ain't broke…

But for an increasing number of Australian's this model is broken.

The original spark that started me on this Financial Autonomy journey was the realisation that the path from studying until around your early 20's, then working in paid employment for the next 40 odd years, then retirement – the traditional path – was becoming less relevant, and a serious re-think was needed.

Home ownership is an unspoken overlay applied to that traditional life path. And whilst I certainly don't believe that owning a home is a bad thing, in re-thinking how our life's journey might unfold, I certainly think it's worth questioning the place of home ownership as a core belief in one's financial life.

And it's not even just the core assumption that we will buy a house, it's the assumption that this should happen in our 20's, or perhaps early 30's if you've been really wild. It's really quite a rigid prescription for life.

So in today's audio blog we're going to explore alternatives to the traditional home ownership path. How can you achieve the Financial Autonomy goal of having choices in life, but chose the life path that makes sense for you.

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You'd have to have been living on Mars for the past decade to not be aware that house prices, especially in Melbourne and Sydney, have risen sharply. The combination of extremely low interest rates, a growing population, and in some cases a lack of supply of new homes, has resulted in existing home owners becoming wealthy, at least on paper, and those outside the home ownership club wondering how they will ever break in.

Reflecting this challenge, between 2002 and 2014, home ownership rates for 25 to 34-year-olds dropped nearly 10 points, to under 30 percent. HECS/HELP debts certainly don't help.

Now those facing this home ownership challenge could rail against the unfairness of it all, but in truth that's likely to have as much impact as putting up an umbrella during a cyclone.

How about instead, focusing on a Plan B? Sure Plan A, the traditional path, worked for your parents, but so did smoking and Saturday afternoons at the TAB. Things change.

So how could you re-imagine your life journey, where the purchase of a home in your late 20's or early 30's, probably with a partner, is not in the plan?

For the purposes of this episode I'm going to assume you've already looked into moving further out of town, going smaller etc. You're at the point where buying a home is just not possible right now, or in the foreseeable future.

If we're to find an alternate path that works for you, it might be useful to consider why buying a home has been seen as such a cornerstone of financial security. Home ownership is attractive because:

1. It provides a guaranteed roof over our head – shelter is a basic human need, and if you own your home, no-one can kick you out.
2. When you retire and have less income coming in, you have a roof over your head at little cost.

Let me know if you can think of other reasons.

So in finding an alternate path, we need to consider how we can solve for those two objectives.

If you don't own your home, then you're renting. And if you're renting, then there is always the chance that the landlord could ask you to leave. Now, if you pay your rent on time, and look after the property well, this isn't a risk with an enormous probability of arising. It does happen, but I think it's a risk that is over estimated.

Put yourself in the landlord's shoes. They've bought this property, and almost certainly borrowed to do so. They want nice regular rent and no headaches. They don't want turnover of tenants, because then they have periods with no rent coming in, and they usually have to pay the managing agent to find a new tenant. Landlords are vulnerable. No rent coming in for a month, or damage to a property, and they're likely to be hurting. Smart landlords value a good tenant.

So pay your rent on time and take care of the place, and the risk of you being asked to move becomes really quite small. Not zero, for sure, but not highly probable. Be the tenant a landlord wants to have in their property.

Longer term financial security is certainly the stronger argument for becoming a home owner. Finding money to pay rent when retired may well be a challenge unless it is well planned for. So if it is the case that buying in the area where you want to live isn't feasible, it becomes really important that you build financial wealth in other areas.

So what might that look like?

To start with you need a savings capacity. If all your income goes back out the door in rent and living costs, then clearly there is no ability to build wealth and create a position of Financial Autonomy.

I worked with a client recently who will be a long term tenant. She was having trouble making the monthly finances work. We explored various ways to solve this, but what it really boiled down to was that she was just paying too much rent given her take home pay. We ascertained that rent was gobbling up 42% of her take home pay. And then when she paid other housing related bills such as gas and electricity, half her income was gone.

This wasn't sustainable.

So as a starting point, aim to have your rent at no more 30% of your take home (ie. after tax) income. Of course the lower the better. That may require some compromise as to location, or size of the place you rent, but it's absolutely critical.

With less than 30% of your income going towards putting a roof over your head, you will have enough money to live, and also have funds available to save and invest.

Okay, so now you have a savings capacity, a foundation stone to you gaining choice through Financial Autonomy. Initially that will build up in the bank, ideally in a separate account specifically for savings. But with interest rates of next to nothing, the growth of your savings will be limited to how much you can tip-in.

If you're to really maximise your ability to build financial wealth, those savings need to be invested. You need to develop an investment strategy that works for you on all levels – risk, time frame, and ethics. Educate yourself and/or get professional help. Check out episode 15 – The sharemarket – a beginner's guide, and also the 3 part series on Common investment mistakes – episodes 12 to 14, to get you started - episode 12; episode 13; episode 14.

You could set-up a strategy where you invest a regular amount every month, no different to paying a mortgage. Unlike a mortgage though, it's changeable as your circumstances change.

Need to suspend contributions for a while whilst on maternity leave say? No problem. Get a pay rise and want to increase your contribution. Easy.

Over time your investment will grow to a very handy nest egg.

For the person perusing the alternate path of non-home ownership, superannuation is likely to take on incre