Homeowners have around 40 times the net worth of renters. While some of this can be explained by the fact people who are already more financially stable are more likely to buy homes, there’s also another factor at play.
See, when you own your own house, you are essentially forced into saving for your future. Every mortgage payment you make gets you closer to acquiring ownership of a valuable asset. After many years, you’ll own something (your house) worth hundreds of thousands or even millions of dollars, and you can cash in by selling and downsizing if necessary.
If you are renting, you don’t get this forced savings. This can make it harder to end up wealthy — but not impossible. You just need to take a different approach. Here’s what you can do.
Keep your housing costs to a reasonable percentage of income
The general advice is to keep total housing costs below 30% of your household income. While it can make sense to follow this rule if you’re a homeowner who is getting the benefit of equity building with your payment, you may want to be more conservative if you’re a renter. After all, your money is just going to your landlord for housing and isn’t increasing your wealth over time.
One approach is to figure out how much it would cost you to buy vs. rent and try to make sure that your rent is cheaper than your mortgage payment would be. If you’re able to save, say, $300 a month by renting, then you can devote that entire amount toward building wealth since you won’t have equity in a home to help you do that. This can make it easier to find money to save and invest — remember, you won’t have the forced savings that comes with making mortgage payments that build equity.
Figure out how much you need to invest to hit target goals
Since you aren’t going to be acquiring a home as a renter, you will need to make sure you have enough money invested to cover housing costs indefinitely. You’ll also need a plan to make sure you have a lot of money in a brokerage account come retirement because you can’t just cash in your house to help supplement your income during that time.
You should figure out how much you’re likely to need, so you can ensure you’re on track. You can do this by estimating what your budget will be as a retiree — including housing expenses. One good rule of thumb is to assume you’ll need 10 times your final income invested to continue funding your lifestyle, but if you plan to pay rent in a high cost of living area as a retiree, you may want to try to set your goals just a little higher.
Once you have an idea of how much you want to end up with in your retirement account, you can use the calculators at Investor.gov to set a monthly target that will allow you to achieve your ultimate goal. Investing should be treated as a must-pay bill, along with your rent, so you can make sure your monthly payments are helping you build wealth just as a homeowner’s would.
Automate your investment process so you also have savings happen effortlessly
Finally, once you know how much to save, make it automatic. Homeowners save effortlessly without thinking about it when they make each mortgage payment. You can save effortlessly without thinking about it if you arrange to have a set amount taken from your paycheck and put into your 401(k) or withdrawn right from your bank account on payday and put into your IRA.
If you automate your investment account contributions, you’re less likely to miss one and more likely to end up rich even as you keep renting.
By implementing these three steps, you can set yourself on the path to financial success and perhaps help to close some of that big gap between the net worths of homeowners vs. renters.
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