The Compound Effect: Building Your Household’s Wealth
Wealth is within reach for many people; however, according to a recent study, 63 percent of Americans said it’s not likely they’ll become rich. While younger people are more likely to say they’ll achieve wealth one day, only 34 percent of people aged 30 to 49 and 21 percent of people aged 50 or older say the same. There is no secret to becoming rich: it takes time, sacrifice and good financial sense. Here are a few ways to build your household’s wealth.
Let Compound Interest Work for You
Compound interest is your interest earning interest. While the concept may work against you when you take out a loan to buy a car or use your credit card, it works in your favor when you’re saving money.
For example, if your savings is growing at a rate of four percent, your investment will double in eight years and quadruple in 16 years. Your money will grow exponentially the longer you save: the more money you’ve saved, the more your money will grow.
Tap into Your Home Appreciation
Experts expect home prices to appreciate 3.24 percent and grow by 21.4 percent cumulatively. If a homeowner purchases a home this year for $250,000, they could earn more than $40,000 in equity over the next five years.
Although the home value of the average American family’s home is $165,000, home values vary by market.3 If you’re curious about the value of your home, give us a call!
Build Equity Faster in Your Home
One of the most compelling reasons to own a home is it allows you to build wealth over time. According to one study, the average homeowner has a net worth of $200,000, which is 31 to 46 times the net worth of the average renter.4 Saving for a down payment, especially if you plan to put down more than 20 percent, helps you adopt good financial habits. The more you put down when you buy, the higher your share of equity when you close.
Although for the first five to seven years, the majority of your payment will go toward interest, over time more money will be applied to the principal. Build equity sooner by choosing a shorter amortization term. While your payment may be higher, you’ll likely qualify for a lower interest rate and will pay less interest over the life of the loan.
Pay Down Your Mortgage…or Not
Many homeowners grapple with whether or not to pay down their mortgage. On one hand, if you pay it down, or pay it off early, you’ll save money on interest, which you can use to make other investments. On the other hand, if your goal is to be debt free, it’s better to pay off your higher-interest debt, such as credit card debt, first before paying down your mortgage debt. Additionally, if you’re saving for retirement, putting extra cash toward your retirement accounts will help you build a nice nest egg to enjoy later on.
If you decide to pay off your mortgage sooner, here are a few ways to do so:
- Pay more money at the beginning of your amortization period and apply it to your principal.
- If you receive a tax refund or other windfall, apply it toward your principal.
- Make one extra payment each year. You’ll save money on interest and pay your loan off sooner.
- Add an extra $50, or another amount you can afford, to the principal of your payment each month.
- If you locked into a 30-year fixed loan, refinance to a shorter, 15-year fixed loan. Your payment may be higher, but you’ll pay it off sooner.
Your financial advisor can help you decide if paying off or paying down your mortgage is right for your goals.
Purchase Investment Property
Investment properties provide passive income to your growing financial portfolio. More than 25 percent of Americans say real estate is the best way to invest money you may not need for the next 10 years. While many people flip houses to make money—that is, they buy a home at a low price, fix it up and sell it quickly—others purchase multifamily properties to create monthly cash flow to save or to reinvest in other properties.
The longer you own a property, the better investment it becomes as you’ll continue to build equity. While rental costs rise with inflation, your mortgage will remain the same. The best part? Once you pay off the mortgage, your cash flow will increase. Remember to create a budget for maintenance each month, between 10 to 20 percent of the rent you receive, or more if the home is older. This will help you save more money in the long run and allow you to prepare for unexpected repairs.
It’s never too late to begin building your family’s wealth. Whether you’re interested in buying a first home, upgrading to a larger home or are thinking of renovating, we have you covered.
Contact us and we’ll answer all of your real estate questions and offer suggestions to help you increase the value of your home.