31/08/2024
Your home might not be the asset you think it is. In fact, it could be your biggest liability and certainly not the most effective retirement fund. While this may sound provocative, let me explain.
Robert Kiyosaki, the author of the best-selling book Rich Dad, Poor Dad, who has amassed a net worth of approximately $80 million, delves into the mindset differences between the wealthy and the middle class. He explains that the wealthy use their income to acquire assets that generate further income, which then covers their liabilities. On the other hand, the middle class often funnel their income directly into liabilities, like mortgages and car loans, leaving them stuck in a cycle of working just to keep up with their financial obligations.
Assets vs. Liabilities
Kiyosaki provides a simple distinction: assets are things that "put money into your pocket," while liabilities are "things that take money out of your pocket." By this definition, your primary residence is likely your most significant liability. Consider how much money constantly flows out of your pocket to maintain your home—mortgage payments, furniture, repairs, garden upkeep, and paint jobs, to name a few. These ongoing expenses make it clear that your home is far from putting money into your pocket.
While your home might appreciate in value over time, it's essential to recognize that this appreciation may be less than in previous decades, especially with current low-interest rates. If interest rates rise, as many expect, property values might stagnate, further diminishing the potential for significant capital gains. But that's not the main point I want you to take away.
Your House is Not Your Pension
What truly concerns me is when people say, "I don't need to worry about my pension—my house is my pension," or "My primary focus is paying off the mortgage."
Let's break this down: Imagine your house is worth USD400,000 (500m naira), and you consider it your retirement fund. If your plan is to downsize, you'd have to sell your home and buy a smaller one, perhaps for USD200,000 (300m naira). Most people I speak with want to live in a comfortable, albeit smaller, home, even if it's a significant downgrade. But you'll still have to maintain this new property.
This scenario leaves you with just one-third of your "pension" (USD200,000) in liquid assets, while you continue to incur costs on the new home. This isn't exactly an appealing retirement strategy.
To complicate matters, when the time comes, many people find themselves unwilling to move. They become emotionally attached to the home they've lived in for years and are reluctant to make such a drastic change.
I'm not suggesting that homeownership is a bad thing or that you can't make money from your property. What I'm saying is that your home should be part of a broader financial plan that includes savings and investments for retirement, not a replacement for them.
When you view it this way, your home may not be the great asset you once thought. Stop treating your house like a pension pot, and you'll be far better off financially.
Diamond Ìlòrí - The Wolf of Real Estate
Investment Banker
Founder Wardiere Oakmount
