Your home as an insurance policy. Don't buy more coverage than you need.

Back in 2009, when Lady Gaga and Kings of Leon were a bit more on fire and the housing market was ice cold, there was a federal program that offered first-time homebuyers a tax credit of $8,000.  In plain language, $8,000 was knocked off your federal tax bill if you bought a home for the first time in 2009 or 2010 and lived in it for at least three years.  

I was working for a tech company at the time and all of my colleagues were young millennials with solid incomes and many were ready to make their first home purchase. The conventional wisdom that many of them were receiving from their elders was to "buy as much house as you can afford" or that "your home is your biggest investment." For some reason, the housing market crash and recession didn't seem to leave a lasting impression on them.

The Wall Street Journal reports that 63% of middle class wealth comes from their homes. Guess how much wealth of the top 1% is tied up in their homes? Just 9%.  One of the reasons that the housing market crash of the late 2000s hit the middle class so hard is because home ownership has historically been their primary means of savings.  When housing values plummeted, it hurt the middle class much more than the wealthy because they had a lot more of their overall wealth tied up in housing.  The wealthy also recovered much faster because they had more of their wealth invested in the stock market, which regained it's pre-recession levels in 2013 and the housing market still hasn't gotten there.

How can you save like the wealthy, and not the middle class, so that you become wealthy?

Home investment insurance policy

True home ownership - with no mortgage - is one of the most valuable tools you can have in your financial independence toolbox. A home is one of the most foundational needs we all have.  Even if you want to spend a lot of time traveling around the world, you probably won't do that your entire life.  A paid-for home is an insurance policy against likely increases in housing and rent prices. If you lose your job and your home is paid for, you won't have what is the largest monthly expense for many Americans and you will be able to weather a cut in your income much better than others.

Here is what your home is not.  Your home is not an investment that will pay your other bills, like food, utilities and transportation. It is not a substitute for investing to become financially independent. Don't view your home as a retirement fund for paying for life.  The only* way you can tap into its assets are by selling it, and then you are left with buying another home or paying rent each month.

*But what about those reverse mortgages older actors promote on TV? Reverse mortgages typically have horrible terms, meaning they are expensive for you to obtain, and they put you back into debt.

Your home is an insurance policy. Don't buy more coverage than you need.

1. Buy as small a home as possible that you can still enjoy.

The tiny house movement has sparked a resurgence in minimalist living. The size of these mini homes generally ranges from 100 to 400 sq. ft.  100. to. 400.  Even at the top end of that range, these homes are 85 to 96% smaller than the average new home being built today, which is 2,600 sq ft.  Tiny house enthusiasts are living their lives in a fraction of the house and mortgage - if they even have one - of an Average Joe.  

Now personally, I don't want to live in a true tiny house. I have a husband, two kids, and a dog. Some families make that work, but not this one.  But do we, do YOU, really need 2,600 sq ft to live in and the mortgage that comes with it?  Do you really need two family rooms, a separate dining room, an office, a master suite with private sitting area, a bathroom for every individual, a guest bedroom, a media room...?  I currently live in a 930 sq. ft. apartment. My kids share a room, and even though I work from home (and have conference calls for a large chunk of my days) and my husband does so part of the time, neither of us have a personal office.  And it works for us.  You can make a smaller space enjoyable and completely functional with smart decorating and design.

2. Buy as cheap a home as possible that you can still enjoy.

Isn't it amazing that there is such a dramatic range in the prices of flooring, cabinets, countertops, appliances, and light fixtures?  Let's take a look at kitchen countertops.  You can install enameled lava at $370 per sq ft and my guess is that figure doesn't include installation.  Laminate countertops, however, start at about $12 per sq. ft.  Both serve the same purpose - they provide a workspace for you to prepare food.  Is it really worth paying 30x more for the same utility?

But laminate is ugly, it's not durable, it has a low resale value... all mostly true (no offense to laminate lovers). The point here is that you need to factor in whether the features in a house you are purchasing, or installing in a house you are renovating or building, are worth the added markup over the cheaper options.

After determining that a purchase is in my budget, I do a gut check and ask myself this:

Is the price of this item worth the utility, longevity, cost-to-own, and enjoyment I receive from it?

All three factors have to be met before I make the purchase, which means that if I say no to any of those, I don't buy it.  

3. Pay off your mortgage painfully fast.

If you have a mortgage, you are paying someone else (the bank) for the privilege of living in your home. A mortgage represents risk because you don't have full ownership over your home. An untimely job loss or disability could force you to move or face foreclosure. A mortgage also represents money that is not being invested in your own financial independence. Every dollar you pay the bank is worth several more that you won't have in your investment funds later on.  Pay off your mortgage, if you have one, as fast as possible. If you need guidance on how to do that, check out my ebook, Mortgage Free in 3!.

4. Invest a mortgage payment each month until you are financially independent.

Once your home is paid off, put the amount you were paying each month for your mortgage and invest it in mutual funds along with your other retirement savings. Or you could save up and purchase a rental property for cash. Or do both. Once you have 25x your annual needed income, you can declare yourself financially independent.

A truly modest and paid-for home is the foundation for financial independence. It lowers your risk, provides security, and frees you to invest substantially in investments that will pay you an income and allow you to become financially independent. It’s working for me and I know it can work for you.