I’m Coming Home

April 7, 2014

This week’s show is meant to complement last week’s, so if you missed it I recommend checking it out in the archives. Briefly, last week’s show explored the behavioral patterns of three demographic and temperamental dichotomies prevalent in today’s culture: the young vs. the old; the rich vs. the poor; the timid vs. the bold. We saw how the old, the rich, and the bold make certain lifestyle choices that readily lead toward more successful, productive lives. This week, we’re exploring what this means in practice.

The title of this week’s show, “Coming Home,” refers to the notion of leaving the financial and behavioral wilderness. It means the end of whimsical, poorly considered spending habits. Essentially, it means settling down to a life of discipline and well-defined personal and household goals.

As long-time listeners know, I’m convinced that the surest way of ‘coming home’ is to do so literally: By buying a home! Homeownership is easily the best financial decision a person can make. A home is an asset. But if you’re renting, you’re investing in an asset that benefits your landlord—not you and not your family. Owning your home means your monthly housing expense is going toward paying principal and building equity With today’s rental market at historic highs, owning is only marginally more expensive than renting upfront, and the equity you build ensures you’ll have a valuable asset when the mortgage is paid off.

Now, is homeownership for everyone? No! Specifically, it is not for people still wandering the financial wilderness. It is not for those who can’t commit to a marginally—or, sometimes, significantly—higher housing expense versus renting because they would rather spend that extra money on frivolous things today instead of investing in their home. I would even argue it’s not for those who would settle for a 30-year mortgage, whereby the borrower wastes hundreds of thousands of dollars on extra interest to avoid slightly higher monthly payments, versus a 15- or 10-year mortgage.

The decision to sacrifice now for better future returns is, as I explained last week, what separates the rich from the poor—and, increasingly, the old from the young. Different generations espouse different values, and the values of thrift, prudence, and investing are largely the values of older generations. The Baby Boomers especially cast thrift to the wind; and if it weren’t for the equity they built up in their homes, most of them would be flat broke as they make their ways to retirement. And the Gen Xers and Millennials aren’t even buying houses; they’re opting to rent in very large numbers.

While cultural influences are the primary drivers that determine how members of a generation make certain decisions, we should never think that we’re pre-determined to live a certain lifestyle because of our age or generation. Of all the behavioral traits separating the rich from the poor, the one with the largest disparity is in how the two groups view luck in determining success; the rich are far more likely to believe luck plays little to no role in determining success. Similarly, no individual should think their generation determines their personal success. Success is a product of the decisions you make and the behaviors you adopt on a personal level.

When mentoring people on adopting successful habits, I recommend making small changes first to see how these can make a big difference. I’ll usually recommend adopting a strict household budget, paying for everything only in cash, and reserving debit or credit card purchases for the holidays. The most destructive practice to a household budget is casually swiping plastic to make purchases.

From here I’ll recommend larger changes, and the single-biggest change a person can make is to simply start reading. Voraciously. Among the rich and the poor, 63% of wealthy parents make their kids read at least two non-fiction books a year, versus just 3% for the poor. As any teacher will tell you, “leaders are readers.” Books are an invaluable resource for acquiring information and knowledge that is not otherwise readily available to an individual. And similar to owning versus renting or saving versus spending, reading versus watching television is a sacrifice that has far larger returns than its more-exciting alternatives.

If you can discipline yourself to sit and read and commit to dozens of hours to reading one book, you’ll find it easier to commit to a budget and resist impulse buys. If you can discipline yourself to owning your home, spending more now on the mortgage and less on new televisions or cell phones, you’ll be rewarded down the road with a valuable asset and more available wealth. And you’ll still have a home.

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