So here's the thing about good financial advice - the formula, itself, is not complicated. In fact, it's very, very simple. You can pick up the basics in an afternoon, and most of it takes no more than 9th grade math. What's difficult about it is the execution - the will and discipline to stick to it over a very long period of time. So, I'll agree with you on this - 99% of people will find the advice "useless" because they'll lack the will and discipline to put it into practice... not because they can't comprehend the formula.Thanks for the reply. I'll start off by saying I absolutely was not referring to a 'keeping up with the jones' mindset, no decision especially financially should be made to 'appear' a certain way to others. Instead I was advocating OP does what he truly wants and shouldn't focus completely on long term. You're absolutely right, when you look at numbers, saving and investing and not spending is the path to more wealth but we all know that right? What you've given is a textbook answer, its lacking a real-life implementation and helpfulness. Personally to me, just thinking the way you've explained is short-sighted; it's just focussing on a long term plan/benefit realisation. Short term and medium term are just as important
I look at this stuff realistically. 99% aren't going to live through their twenties saving or investing all their spare cash and not 'blowing' any, even if you tell them - so to 99% of people that advice is useless IMO. If you start to understand the psychology of people/vast majority of young adults then you'll see this and be able to offer advice they have a higher chance of following. Eg psychology of humans = always live within your means. This is where my 'get your biggest mortgage' advice comes from. Vast majority of people will spend their surplus cash, their lifestyle will subconsciously adjust. So 2 people who earn the same; one buys a £200k house, the other buys a £500k house. Fast forward 10 years its almost certain that the latter has more wealth than that former. The former will be drawn into spending more money over the 10 years on disposable elements, all while the latter will be paying more every month into his mortgage forcing himself to save. On top of this the latter got the short term benefit of living in a nicer house.
For me, the car is unique, I see it as a passion, and it is for alot of people, it is a dream and not because of 'showing it off' but because we're brought up with motorsport and the love of how cool these cars are. However as I said in my first post (again looking at it realistically) what happens in the real world is if people wait to get it, they end up never getting it. I've had countless conversations with older chaps who say they wish they'd bought one when they could before they had kids etc. I can even see it with a couple of my mates. They could absolutely afford one now comfortably and its their dream but their missus and society convinces them its too risky and years have gone by always with 'I'll get it when this happens' but when 'this' happens theres always something else.
I'm not saying OP shouldn't have a long term plan. I'm saying my advice is it's possible to have a short term plan that plays into a long term plan or don't be afraid to base your long term plan around some short term benefits. Look for realistic ways to have what you want in the short term as well as ensuring it turns into something long term.
As far as "text book" versus "real life implementation" - I'm giving you "real life" experience, not something I've read in a text book. I wish, however, there were some actual "text books" distributed to kids in school on this stuff - we'd have a lot less of the population struggling with finances.
"So 2 people who earn the same; one buys a £200k house, the other buys a £500k house. Fast forward 10 years its almost certain that the latter has more wealth than that former. The former will be drawn into spending more money over the 10 years on disposable elements, all while the latter will be paying more every month into his mortgage forcing himself to save."
Let's analyze that theory.
About 12 years ago here in the US we had our last recession - "the Great Recession" as it became known. A large part of the cause was a major housing bubble - people following this kind of approach you're describing... buying the most house they could afford because, "well, housing value only goes up" and "the bank offered it, so I'll take it." Needless to say, it didn't end well. When massive layoffs hit, those who were in very expensive houses that they couldn't afford, found themselves unemployed, debt up to their eyeballs, and no way to pay the mortgage. Meanwhile, because mortgage defaults were widespread, housing prices plummeted. Some areas saw values dive 30, 40, 50%. The market was swamped with houses up in fire sales. Banks were taking possession of houses left and right. Many millions of people found themselves in bankruptcy, even if they got a new job, because it happened to pay less and they couldn't afford their debts. Even many who were lucky to have jobs and were more cautious with their home purchase still found themselves in an underwater property - a mortgage that was much more than the value of the property. Here in CT, many of our wealthiest towns have homes STILL selling below their 2005 - 2007 highs... 15 years later.
A house shouldn't be thought of as a forced savings/investment plan... certainly not to the point of being "house poor" (taking the maximum loan amount). Even IF something like the 2008 crash didn't happen, housing, in general, will under-perform the broad equities markets. This is why Warren Buffet famously denounces the idea of putting his wealth into personal real estate. Investment properties (corporate, rentals, etc.) managed appropriately are a different story. Houses are also liabilities - the bigger and nicer the house, the more it costs to maintain it. The same can't be said about owning equities.
Don't get me wrong, I have nothing against buying a nice house - I own a nice house. But to give you an idea of what I think about "house wealth," I don't consider it part of my net worth. Why? It's illiquid. I need a place to live, after all. It's also, as mentioned above, a major liability. Between my yearly taxes, landscaping, repairs that pop up, things that need renovating... I spend tens of thousands a year just to live in my house (and that's not a mortgage). Meanwhile, my brokerage account doesn't have those same liabilities - it just produces more money!
But let's do the math just to prove this point. The guy who buys the $200k house versus the $500k house... it again comes down to discipline. If APPROVED for $500k and choosing to spend $200k, that person is already showing some good financial discipline. So I trust they'd have some discipline to invest the majority of the difference. If you run an amortization table, you'll see just how little you pay in principle during the first 10 years of a mortgage (the vast majority will go to paying interest, even at a low rate). Let's say Guy 1 buys a $500k house at 4%. After 10 years, he paid $181k in interest to the bank, and he has a balance of $392k and $108k paid off. If real estate increased by 2% per year (a realistic long-term rate that mirrors general inflation), his $500k property may now be worth $609k. So, after 10 years, he's spent $181k (in interest) and has gotten a return of $217k - the value of his home equity (paid principle + appreciation). Now, factor in taxes, maintenance, etc, and you'll see the picture gets worse. But let's even leave that out for the moment - $181k produced $217k over 10 years for a measly 1.83% annualized return and total return of $36,000. Pretty terrible. Not surprisingly, the bank made out better.
In contrast, the guy who bought the $200k house (Guy 2) saves $1,433/mo on his mortgage payment over Guy 1 (at the same 4% term). He takes that $1,433/mo and invests it in an S&P 500 index and receives an 8% return over 10 years. Wait for it... after 10 years, his investments SOLELY from his invested mortgage payment savings are worth $262k. Regarding his mortgage, he'll have paid $72k in interest, have a balance of $157k, and a house worth $243k (at equal appreciation rates to Guy 1). He'll have spent $72k and gotten a return of $86k, or a total return of $13k with an equally poor 1.8% annualized return on his house.
So, for the exact same cash outlay on a monthly basis, Guy 1 ($500k house) ended up with $217k of equity after 10 years. Guy 2 ($200k house) ended up with $86k of home equity and $262k of stock equity, for a total of $348k - outperforming Guy 1 by a very large $131k. Meanwhile, he'll also have paid less in taxes, maintenance, electricity, heating, etc... none of which is factored in here. Guy 1, to be fair, has enjoyed a nicer property. And therein lies the truth about your primary residence - it's a lifestyle choice, not an investment. As far as investments go, keep those in the market. Your house barely qualifies unless you've found another way to monetize it - it's a liability in most cases.
But to be fair to your original argument... it comes down to discipline. Sure, Guy 2 COULD have simply squandered all of his additional savings on those monthly mortgage payments. If you're going to lack discipline, you won't build wealth. Likewise, if you're going to use a house to "force yourself to save," sure you'll accomplish that... probably at a very poor long-term rate of return compared to the market, all the while putting yourself in a house poor position that leaves little flexibility if "life" should happen along the way. The bank will love you, though. To each his own, but again... the truth lies in the math. So, if you want to dumb it down and automate good behavior for the undisciplined person who needs to be "forced" into properly saving... I'd tell that person to buy the less expensive house and set up an automated brokerage contribution for the remainder of that would-be larger mortgage payment. Done.