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05 Dic 2015 - 02:19:01

A Plan B For Millennials Who Aren't or Won't Be Homeowners | Bob Lotich

The topic of Millennials opting out of homeownership has become a major phenomenon in recent years. There is plenty of research, as well as various theories, as to why this is happening. Wage stagnation, job instability, high debt levels, lack of ability to save for a down payment, and the need for employment mobility are commonly cited causes.

But whatever the reasons are for the generational shift away from home ownership, Millennials are going to have to find a way to attain something similar to the financial benefits that homeowners enjoy. Inability to own a home shouldn't doom you to long-term financial insecurity.

Let's consider three major benefits you won't be getting as a result of not being a homeowner - and how you can overcome them with specific strategies.

Building Equity Passively

This is probably the biggest single advantage of homeownership. Through a combination of both price appreciation and mortgage amortization, the house steadily - and click here passively - builds equity. While it's doing that, it's also providing shelter for the occupying household. In that regard, the home functions primarily as a place to live, with the growth in equity happening largely out of view.

That passive equity accumulation is a large part of why so many current retirees have been able to live in relative comfort, even if they haven't been devoted savers. The sale of a home with several hundred thousand dollars worth of equity can help make retirement dreams come true.

If you do not believe that homeownership is in your future, you will be at a decided disadvantage as a result of not having this benefit. However there is a way that you can create a financial strategy that can provide similar advantages.

As a renter, you can create your own equity accumulation program by committing yourself to saving and investing money. This is usually best done through a dedicated, tax-sheltered retirement plan, but there are other ways as well. You can simply contribute money to a brokerage account or mutual fund on a regular basis. And by investing primarily in index funds, you can avoid the capital gains tax liabilities that come with most other fund-related investing (this is something of hvac a backdoor tax-deferral method).

This will come at a cost. Where the homeowner builds equity simply by making his or her monthly house payment, you as a renter, will have to make savings contributions over and above your monthly rent payment.

For example, let's say that your rent is $1,000 per month, and you contribute $350 per month, or $4,200 per year, into a traditional or Roth IRA. After 30 years - the length of a typical mortgage - your contributions will grow to nearly $500,000, assuming an 8% average annual rate of investment return. That's pretty close to the equity that many more well-off people have just before retiring.

Now it may be true that paying $1,000 in rent, plus $350 in IRA contributions may be higher than a mortgage payment in your area. But it also needs to be considered that as a tenant, you won't need to pay for repairs and maintenance to the property. This is especially significant in regard to major repairs, such as replacing the roof or HVAC system, repaving the driveway, or making major system repairs, such as plumbing or electrical work. If the absence of these repairs doesn't completely cover $350 per month in investment contributions, it will certainly come very close.

Amortizing Your Mortgage Out of Existence

Even if a homeowner makes no effort whatsoever to pay off his mortgage early, the loan will still be amortized out of existence, generally in no more than 30 years. As a renter, you may not have a mortgage, but it's likely that you have other debt. It's equally likely that the debt that you have is large enough that it's one of the major reasons why you're not a homeowner, or do not expect to be one.

Your alternative renter strategy could be to commit to getting completely out of debt. This is especially true if you have large student loan debts. These loans can be large enough that they are something like a mortgage, only there is no real estate behind the loan. But you can still commit to pay off your student loan debts, and hvac website all of your debts, in much the same way that a homeowner pays off her mortgage.

A big pile of debt - particularly student loans - can be intimidating. But that may not be the case if you give yourself 10, 15, or click here 20 years to pay them off. The idea is to treat your debts like a mortgage. In doing so, it's critically important that you at least make your regularly scheduled monthly payments - and a little extra if possible - and not take on any new debt.

In due time, you'll be debt free, and that's one of the most important long-term financial goals that you can have, whether you are a homeowner or renter.

Generous Income Tax Deductions

Homeowners get a generous tax deduction for the mortgage interest, real estate taxes, and sometimes private mortgage insurance portions of their house payments. This is a difficult benefit to duplicate if you're a renter, but you may be able to get close nonetheless.

The biggest alternative tax break that you can get is saving for retirement. Contributions to most retirement plans (the Roth IRA being the notable exception) will get you an immediate reduction in your taxable income. For this reason, you should seek to save and invest primarily through any retirement plans you have available.

This will not only give you an increased income tax deduction, but it will also represent a dollar-for-dollar increase in your savings, and therefore in your net worth.

And for what it's worth, tax deductions for homeownership aren't nearly as generous as they once were. With the standard deductions for 2015 raised to $12,600 for married filers, and $6,300 for single filers, homeowners can only deduct their housing expenses to the degree that they exceed these thresholds. That cuts way down on the homeowner tax advantage.

Just because you aren't a homeowner - and even if you think you never will be one - doesn't mean that you can't at least partially duplicate the benefits of being one. Your financial future may even depend on you're doing just that.


Buying A Round Of Drinks At The Bar

You know you can't afford it. You might as well be burning your money.

 Forgetting To Establish A Credit History

A good credit history is essential to a successful financial future. Landlords, lenders, insurers and even employers use it as a way to judge you.

Taking Out Way Too Many Credit Cards

Yes, you want to make sure that you establish a credit history, but that does not mean taking out every credit card imaginable. Taking our high-interest cards with large balances can lower your credit score and lead to overspending.

Paying Bills Late

If you want to increase your credibility in the eyes of lenders, paying bills on time is essential. Also, it is a good way to avoid unnecessary late fees!

Rushing To Get Your Graduate Degree

A graduate degree is not only a financial investment, but a time investment. Before embarking on a post-graduate degree, it is important to do a cost-benefit analysis to ensure the diploma you are seeking is right for you.

Building Way Too Much Debt Early On

Going after a degree at a time when you have to take out enormous student loans just to graduate puts you at a significant financial disadvantage once you finish school.

Using Emergency Funds For Non-Emergencies

It is called your emergency stash for a reason! And no, a flash sale at Nordstrom Rack is not an emergency.

Eating Out Too Much

Be honest, when was the last time you actually had a full fridge? Despite what you hvac keep telling yourself about how expensive groceries are getting, the bottom line is that eating at home saves money, especially if you are single.

Not Saving For Retirement

We understand that retirement could not feel further way when you are in your 20s. But it is never too early to start saving. Need an incentive? When you are young, you have the advantage of giving your investments much more time to accrue interest and grow.

Paying Too Much In Taxes

As much fun as it is to get a tax return at the end of the year from the IRS, you only get a big refund when your employer is withholding too much money from your paycheck during the year. If that's the case for you, adjusting your withholdings may be a good idea.

Paying Too Much In Rent

Most budget gurus suggest that your rent should be no more than 30 percent of your monthly income. If you are anything like us, you are paying much more than that.

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