Money Advice

The greatest investment myth you’ve ever been sold

Posted by The Simply Money Advisors Team on Oct 24, 2018 11:58:23 AM

Shhhh….

Want in on a little secret?

Your house is not the “greatest investment you’ll ever make.”

You’ve been sold a myth

Over the years, lenders and many in the real estate industry have made you believe a home is an “investment.” It’s not. It’s nothing more than a big expense. And, of course, a place to live.

Along with principal and interest payments come property taxes, utility bills, homeowner’s insurance, upkeep and repairs. Don’t believe us? Do some quick math on what you spend every time you make a weekend trip to a home improvement store. You’ll be shocked at how much you’re spending each year for just weed killer, flowers and paint.

Moreover, historically, home values have only increased a little more than the rate of inflation, around 3% annually. And there’s no rule saying your house has to go up in value every year. Just look at the housing crisis of 2008.

So, go ahead and add up what you’ve spent during the time you’ve lived in your home.

Chances are, you’ve spent a lot more over the years than you’ll get at sale, and we haven’t even included the sales commission a real estate agent will get.

But what about the tax write-off?

There’s one more myth you’ve been sold and that’s the long-term benefit of the mortgage interest deduction on your income taxes.

If you itemize your taxes, you’re allowed to deduct mortgage interest paid. But remember, the longer you’re in your home, you pay more in principal and less in interest each year on your mortgage. So, in the later years of a mortgage, the majority of the payment goes towards principal, reducing the amount of interest payments you can deduct from your taxes.

If you take the standard deduction, you can’t itemize your mortgage interest paid, period. And according to the Tax Foundation, almost 75% of taxpayers have typically chosen to take the standard deduction. Plus, since tax reform passed earlier this year essentially doubles the standard deduction, even more of you will take that option (about 9 in 10, according to some estimates).

Simply put, the mortgage interest deduction is irrelevant for most homeowners. 

A retirement-crisis contributor

This isn’t to say owning a home is a poor decision. Quite the contrary. Homeownership is vital to communities, helping to stabilize neighborhoods.

But at Simply Money Advisors, we believe too much focus on “the house” is one of the biggest personal finance mistakes someone can make. In fact, we believe this misguided prioritization is one of the contributing factors to the retirement crisis in America.

This thinking is two-fold: if you stretch a budget to pay for a mortgage you can’t truly afford, you’re not able to save for the future; similarly, because you think your house (and its mounds and mounds of supposed equity) will bail you out in retirement, you don’t make saving a priority.

That’s a recipe for a retirement disaster.

The Simply Money Point

Believing a home is a great investment and a huge tax break has led to 40 years of overspending on housing in America, as well as retirement account neglect. It’s time to shift the collective mindset. Be sure to look at your home purely as shelter, meaning it’s an “expense” you’re forced to pay every month – not an “investment” to tap in the future.

Topics: Financial Planning

Disclaimer

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Simply Money Advisors), or any non-investment related content, made reference to directly or indirectly will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, this content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained here serves as the receipt of, or as a substitute for, personalized investment advice from Simply Money Advisors. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Simply Money Advisors is neither a law firm, a certified public accounting firm, nor a tax advisory firm and no portion of the blog content should be construed as legal, accounting, or tax advice. Please consult your own attorney, accountant, and tax advisor for legal, accounting, and tax advice. A copy of the Simply Money Advisors’ current written disclosure statement discussing our advisory services and fees is available for review upon request. Advisory services offered through Simply Money Advisors, a SEC registered investment adviser. Insurance services are offered through Simply Money Insurance Agency, a separate entity from Simply Money Advisors. Simply Money™ and the spiral symbol are trademarks of Simply Money IP Holdings, LLC.

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