The Automatic Millionaire: Ch 6

by Joseph · 0 comments

in Friday Book Club

Chapter 6 of The Automatic Millionaire is entitled Automatic Debt-Free Homeownership

David Beck stresses three principle goals in The Automatic Millionaire.  As we’ve previously covered the first two goals are to decide to pay yourself first 10 percent of your pretax (or gross) income and the second is to make it automatic.  The third principle goal which he stresses as very important to the ultimate goal of building wealth and financial independence is to buy a home and pay it off automatically.  As David says this chapter of The Automatic Millionaire is all about why you should own a home and “how you can pay for that home automatically so you can be debt-free before you’re too old to enjoy it.”

The fact is, you aren’t really in the game of building wealth until you own some real estate.

Mr. Bach is so passionate about his belief that owning your own home is most important to becoming financially independent that he even went so far as to say: “The fact is, you aren’t really in the game of building wealth until you own some real estate.”  I will be quick to point out that I have a problem with this statement of his, although I do agree with the idea that owning your own home can be beneficial to building wealth.  I’ll come back to this later.

Six Reasons Why Homes Make Great Investments

David brings up six reasons why he thinks that homes make great investments.  I’ll list them here for your reading pleasure.

  1. Forced Savings
  2. Leverage
  3. OPM (Other People’s Money)
  4. Tax Breaks
  5. Pride of Ownership
  6. Real Estate Has Proven to be a Great Investment

Some of these are easier understood than others.  I’ll briefly explain what he says about each of these reasons for homeownership.  Forced savings refers to the fact that (in a good market anyway) buying a home forces you to save in that as you pay down the principle balance of the loan you’ll gain equity in your home.  Leverage is the ability to use money that is not yours to your advantage.  Basically if you purchase a home for $100,000 but only put 10,000 down and then five years later your home is worth $150,000 dollars you’ve gained $50,000 off of only a $10,000 dollar initial investment.  OPM is essentially the same as Leverage in that it refers to using other people’s money to your financial advantage.  Tax Breaks are relatively obvious: the government allows you to write down interest and other related home ownership expenses from your taxes.  Pride of Ownership is not exactly fiscally related, but nonetheless a nice benefit of home ownership.  David’s final reason that Real Estate is a great investment is disputable by many especially during hard times such as those we’re currently experiencing.  However it should be said that I believe that over the long run it is at least a good investment, but not necessarily a great one.

I Can’t Afford To Buy A House

So many people have used this excuse that it has become old and tired.  If you can afford rent there is a decent chance that you might be able to afford a house as well.  I won’t go into the specifics here for the sake of space and time, but basically David makes the point that with mortgage rates so low owning a home doesn’t cost (usually) much more than typical rents in your city or town.  He tries to back this thought up with informational charts showing how much a typical mortgage would cost for a certain amount spent on a house.  He also makes the point that there are several government programs in place which help first-time home buyers in their quest to own their own home.  These programs range from informational to actually providing help with a down payment or closing costs.  In short?  Research before you decide that you can or can’t afford to buy a house.

Why This Logic is Partially Flawed

As I mentioned previously David said that “you aren’t really in the game of building wealth until you own some real estate.”  This logic is flawed.  I agree that owning real estate can build wealth, but the act of building wealth does not require the ownership of real estate.  If someone preferred to live in a luxury apartment, for example, over owning their own home there would be nothing to stop them from building wealth.  They could still save a good chunk of their income and wisely invested there would be no reason that they could not build even more wealth than someone who chose to own a home.  It’s all circumstancial and basically I think it’s wrong to assume that unless you own real estate you won’t really be building wealth.

The Rundown

Essentially the point that Mr. Bach is trying to make throughout this chapter is that with just a little bit of planning and hard work anyone can become a homeowner.  He also brings up that if you make it automatic and pay even 1 extra payment a year towards your mortgage that you can cut off somewhere between 5 – 10 years off a traditional 30 year fixed mortgage.  If done with a little bit of foresight and planning owning a home can allow you to be able to build more wealth than you normally might.

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